On reactive model-free stock trading in a complex financial market, Chaos & Complex Systems Seminar, Bob Barmish, UW Department of Electrical and Computer Engineering
2014-10-28 17:05 - 18:00 UTC | 4274 Chamberlin Hall (Refreshments will be served)
In this seminar, I will describe a new paradigm for stock trading in a complex financial market. The theory does not make use of a predictive model for the time-varying stock price. Instead, based on the use of a feedback control loop, the investment level is dynamically adjusted over time via a "reactive adaptation'' mechanism. In the finance literature, such a scheme falls under the umbrella of "technical analysis.'' After explaining what is meant by technical analysis, I will address a long standing conundrum in finance: Why is it that so many asset managers, hedge funds and individual investors trade stock using technical analysis despite the existence of a significant body of literature claiming that such methods are of questionable worth with little or no theoretical rationale? Whereas existing work on this question by academics and practitioners in finance involves extensive statistical analysis of a trading algorithm via back-testing with historical data, our new feedback-based approach is aimed at providing a theoretical rationale which explains both successes and failures.
