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The power of control theory on financial stock market_CHHSIEH

Innovation_CHHSIEH
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Chung-Han Hsieh

on 24 November 2015

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Transcript of The power of control theory on financial stock market_CHHSIEH

University of Wisconsin-Madison
The power of control theory on financial stock market
Instructor: B. Ross Barmish
Student: Chung-Han Hsieh
Outline
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
BACKGROUND & INTRODUCTION
What is Control theory ?
What is Control theory ?
In fact.
Control theory has gained a huge success on many different fields and yielded enormous innovations.
Industrial Automation System/Robot
Spacecraft/rocket system
Automobile
The Relationship between Financial Stock Market and Control Theory
A Bathtub Analogy
What's NEXT?
What might control theory could offer to the area of financial stock trading?
Control theory is a theory which is used for controlling somethings.
In nature, it is a branch of Applied Mathmatics
Example 1
Example 2
Example 3
"If the bathtub water is
too hot
, add
___ water
.
If the bathtub water is
too cold
, add
___ water
.''
Similarly, to handle the
unpredictable stock market
:
We can design an
adaptive feedback controller
which is based on the similar temperature trend-following principle.
The basic idea
Main Result
Simultaneous-Long-Short Control, SLS Control
Real-Market Example (Trading the Nasdaq exchange-traded fund Quadruple Q's)
Main Result
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.
The Contrasting Opinion
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
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)
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
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)
Conclusion
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.
Q&A
Thanks for your listening
Really??
Can you predict Microsoft Stock Price at Jan-2011? by just analysis the historical data?
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]
[1] B. Ross Barmish, On the Performance Limits of Feedback Control-Based Stock Trading Strategies, Proceedings of the American Control Conference, San Francisco, 2011
[1]
Main Result
Arbitrage Theorem
[1] B. Ross Barmish, On the Performance Limits of Feedback Control-Based Stock Trading Strategies, Proceedings of the American Control Conference, San Francisco, 2011
Proof: omitted.
[2]
[2] B. Ross Barmish, On the Performance Limits of Feedback Control-Based Stock Trading Strategies, Proceedings of the American Control Conference, San Francisco, 2011
always positive !
(Sep. 2006- Aug. 2008)
[1] Arbitrage: A possibility of a
risk-free profit with zero cost. (Ref: Wikipedia)
[1]
Full transcript