Using Genetic Algorithms For Robust Optimization In Financial Applications
Olivier V. Pictet, Michel M. Dacorogna, Bastien Chopard, Mouloud Oussaidène, Roberto Schirru, Marco Tomassini · 1998
In this study, optimal indicators and strategies for foreign exchange trading models are investigated in the framework of genetic algorithms. We first explain how the relevant quantities of our application can be encoded in "genes" so as to fit the requirements of the genetic evolutionary optimization technique. In financial problems, sharp peaks of high fitness are usually not representative of a general solution but, rather, indicative of some accidental fluctuations. Such fluctuations may arise out of inherent noise in the time series or due to threshold effects in the trading model performance. Peaks in such a discontinuous, noisy and multimodal fitness space generally correspond to trading models which will not perform well in out-of-sample tests. In this paper we show that standard genetic algorithms will be quickly attracted to one of the accidental peaks of the fitness space whereas genetic algorithm for multimodal functions employing clustering and a specially designed fitness...