The power of control theory on financial stock market_CHHSIEH

Q&A

Thanks for your listening

The Contrasting Opinion

Conclusion

Some Potential Drawback of Control theory

• It is highly mathematical based method
• Not easy to understand or implement
• People tend to use other traditional financial tools, such as Technical Analysis

• We introduce a quite new research line by using the control theory (e.g., SLS control) on the Financial stock market.
• SLS control guarantees the positive trading gain
• Traditional Financial market approaches are failed. we need new tool to develop a more solid environment for asset allocations.

Why people tend to use Technical Analysis?

There are 2 reasons:

• Easy to understand and implement.
• Some investors believe that history tends to repeat itself.

Personal Comment for Technical Analysis

Really??

Can you predict Microsoft Stock Price at Jan-2011? by just analysis the historical data?

• No one can predict the price of future stock market by only examining the past historical data
• It contradicts the efficient-market hypothesis [1].
• An analogy to “driving the car by seeing the back mirror only”.

Would you consider this behavior is safe ?

[1] the efficient-market hypothesis (EMH): future prices cannot be predicted by analyzing prices from the past. (Ref: Wikipedia)

Technical Analysis

Indeed, many asset managers and investors prefer to use trend-following methods so called technical analysis to allocate their asset.

for example K-line (Candlestick chart)

K-line chart

[2]: A candlestick chart is a kind of bar-chart used primarily to describe price movements of a security, derivative, or currency over time. (Ref: Wikipedia)

[1]

Main Result

[1]

Main Result

Real-Market Example (Trading the Nasdaq exchange-traded fund Quadruple Q's)

The Relationship between Financial Stock Market and Control Theory

BACKGROUND & INTRODUCTION

(Sep. 2006- Aug. 2008)

Simultaneous-Long-Short Control, SLS Control

A Bathtub Analogy

always positive !

What is Control theory ?

The basic idea

Similarly, to handle the unpredictable stock market:

We can design an adaptive feedback controller which is based on the similar temperature trend-following principle.

Example 2

Spacecraft/rocket system

Example 3

Industrial Automation System/Robot

Example 1

Automobile

What is Control theory ?

• Control theory is a theory which is used for controlling somethings.
• In nature, it is a branch of Applied Mathmatics

Control theory has gained a huge success on many different fields and yielded enormous innovations.

In fact.

What's NEXT?

What might control theory could offer to the area of financial stock trading?

the overall gain/loss gain which controlled by SLS controller can be always positive; namely, the investor can achieve arbitrage (positive gains) situation in our control scenario.

"If the bathtub water is too hot, add ___ water.

If the bathtub water is too cold, add ___ water.''

[1] B. Ross Barmish, On the Performance Limits of Feedback Control-Based Stock Trading Strategies, Proceedings of the American Control Conference, San Francisco, 2011

[2]

Outline

Main Result

University of Wisconsin-Madison

[1]

Arbitrage Theorem

The power of control theory on financial stock market

• Background and Introduction
• The Relationship between Financial Stock Market and Control Theory
• Main Results:

-Simultaneous Long-Short control

-Arbitrage Theorem

-Real-Market result

• The Contrasting Opinion
• Personal Comments
• Conclusions
• Q&A

Instructor: B. Ross Barmish

Student: Chung-Han Hsieh

Proof: omitted.

[1] Arbitrage: A possibility of a risk-free profit with zero cost. (Ref: Wikipedia)

[2] B. Ross Barmish, On the Performance Limits of Feedback Control-Based Stock Trading Strategies, Proceedings of the American Control Conference, San Francisco, 2011