Adaptive online portfolio selection with transaction costs

Sini Guo*, Jia Wen Gu, Wai Ki Ching

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

26 Citations (Scopus)

Abstract

As an application of machine learning techniques in financial fields, online portfolio selection has been attracting great attention from practitioners and researchers, which makes timely sequential decision making available when market information is constantly updated. For online portfolio selection, transaction costs incurred by changes of investment proportions on risky assets have a significant impact on the investment strategy and the return in long-term investment horizon. However, in many online portfolio selection studies, transaction costs are usually neglected in the decision making process. In this paper, we consider an adaptive online portfolio selection problem with transaction costs. We first propose an adaptive online moving average method (AOLMA) to predict the future returns of risky assets by incorporating an adaptive decaying factor into the moving average method, which improves the accuracy of return prediction. The net profit maximization model (NPM) is then constructed where transaction costs are considered in each decision making process. The adaptive online net profit maximization algorithm (AOLNPM) is designed to maximize the cumulative return by integrating AOLMA and NPM together. Numerical experiments show that AOLNPM dominates several state-of-the-art online portfolio selection algorithms in terms of various performance metrics, i.e., cumulative return, mean excess return, Sharpe ratio, Information ratio and Calmar ratio.

Original languageEnglish
Pages (from-to)1074-1086
Number of pages13
JournalEuropean Journal of Operational Research
Volume295
Issue number3
DOIs
Publication statusPublished - 16 Dec 2021
Externally publishedYes

Keywords

  • Adaptive moving average method
  • Decision support systems
  • Linear programming
  • Online portfolio selection
  • Transaction cost

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