Chaos based portfolio selection: A nonlinear dynamics approach

Nicolo' Pecora, Alessandro Spelta, Paolo Pagnottoni

Research output: Contribution to journalArticlepeer-review

Abstract

Time series forecasting is of fundamental importance for financial market prediction and, consequently, for portfolio allocation strategies. However, non-stationarity and non-linearity of most financial time series often make these tasks difficult to perform. In this paper, we propose a methodology based on chaos and dynamical systems theory for non-linear time series forecasting and investment strategy development, which is able to correctly make predictions at long time horizons. We construct Constant Chaoticity Portfolios (CCP) and evaluate their performances on the survival components of the STOXX Europe 50 index and the Hang-Seng index. Results show that the CCP overwhelms several competing alternatives, both in terms of net profits and risk-return profiles. Our findings are confirmed by a sensitivity analysis on the parameters of the underlying model and over different choices of forecast horizons.
Original languageEnglish
Pages (from-to)N/A-N/A
JournalExpert Systems with Applications
Volume188
DOIs
Publication statusPublished - 2022

Keywords

  • Chaos theory
  • Financial markets
  • Time series forecasting
  • Statistical mechanics
  • Portfolio strategies

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