PORTFOLIO OPTIMIZATION, HIDDEN MARKOV MODELS, AND TECHNICAL ANALYSIS OF P&F-CHARTS
Robert James Elliott, Juri Hinz · International Journal of Theoretical and Applied Finance · 2002
In this work we introduce an adaptive method of portfolio optimization. The basic idea is to describe essential movements of the stock price using a hidden Markov model and to calculate the optimal portfolio using a recursive algorithm. The portfolio optimization is adaptive in the sense that the standard EM-algorithm fits the model to historical data, which improves the portfolio performance.