A profitable trading and risk management strategy despite transaction costs

Duran A., Bommarito M. J.

QUANTITATIVE FINANCE, vol.11, pp.829-848, 2011 (SCI-Expanded) identifier identifier

  • Publication Type: Article / Article
  • Volume: 11
  • Publication Date: 2011
  • Doi Number: 10.1080/14697680903449815
  • Journal Indexes: Science Citation Index Expanded (SCI-EXPANDED), Social Sciences Citation Index (SSCI), Scopus
  • Page Numbers: pp.829-848
  • Keywords: Behavioral finance, Anomalies in prices, Market efficiency, Market prediction, Overreaction, Computational finance, Financial markets, Financial modelling, LONG-MEMORY, MARKET
  • Istanbul Technical University Affiliated: Yes


We present a new profitable trading and risk management strategy with transaction cost for an adaptive equally weighted portfolio. Moreover, we implement a rule-based expert system for the daily financial decision-making process using the power of spectral analysis. We use several key components such as principal component analysis, partitioning, memory in stock markets, percentile for relative standing, the first four normalized central moments, learning algorithm, and switching among several investment positions consisting of short stock market, long stock market and money market with real risk-free rates. We find that it is possible to beat the proxy for the equity market without short selling for 168 SP 500-listed stocks during the 1998-2008 period and 213 Russell 2000-listed stocks during the 1995-2007 period. Our Monte Carlo simulation for both the various set of stocks and the interval of time confirms our findings.