TY - JOUR
T1 - Chaos based portfolio selection: A nonlinear dynamics approach
AU - Spelta, Alessandro
AU - Pecora, Nicolo'
AU - Pagnottoni, Paolo
PY - 2022
Y1 - 2022
N2 - 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.
AB - 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.
KW - Chaos theory
KW - Financial markets
KW - Portfolio strategies
KW - Statistical mechanics
KW - Time series forecasting
KW - Chaos theory
KW - Financial markets
KW - Portfolio strategies
KW - Statistical mechanics
KW - Time series forecasting
UR - http://hdl.handle.net/10807/194510
U2 - 10.1016/j.eswa.2021.116055
DO - 10.1016/j.eswa.2021.116055
M3 - Article
SN - 0957-4174
VL - 188
SP - N/A-N/A
JO - Expert Systems with Applications
JF - Expert Systems with Applications
ER -