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Constrained Mixture Models for Asset Returns Modelling

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  • Iead Rezek

Abstract

The estimation of asset return distributions is crucial for determining optimal trading strategies. In this paper we describe the constrained mixture model, based on a mixture of Gamma and Gaussian distributions, to provide an accurate description of price trends as being clearly positive, negative or ranging while accounting for heavy tails and high kurtosis. The model is estimated in the Expectation Maximisation framework and model order estimation also respects the model's constraints.

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  • Iead Rezek, 2011. "Constrained Mixture Models for Asset Returns Modelling," Papers 1103.2670, arXiv.org.
    • Handle: RePEc:arx:papers:1103.2670
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    1. Duangkamon Chotikapanich & William E. Griffiths, 2008. "Estimating Income Distributions Using a Mixture of Gamma Densities," Economic Studies in Inequality, Social Exclusion, and Well-Being, in: Duangkamon Chotikapanich (ed.), Modeling Income Distributions and Lorenz Curves, chapter 16, pages 285-302, Springer.
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