Tag Archives: continuous time

Quant analytics: continuous time markov chains as applied to asset pricing (order book). Any knowledge/experience?

Quant analytics: continuous time markov chains as applied to asset pricing (order book). Any knowledge/experience?

Starting to look at continuous time markov chains as applied to asset pricing (order book). Does anyone have any knowledge/experience in this area?
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I was recently exploring this:
This paper merges the literature on technical trading rules with the literature on Markovswitching to develop economically useful trading rules. The Markovmodels’ out-of-sample, excess returns modestly exceed those of standard technical rules and are profitable over the most recent subsample. A portfolio of Markov and standard technical rules outperforms either set individually, on a risk-adjusted basis. The Markov rules’ high excess returns contrast with mixed performance on statistical tests of forecast accuracy. There is no clear source for the trends, but permitting the mean to depend on higher moments of the exchange rate distribution modestly increases returns.
http://www.sciencedirect.com/science/article/pii/S037842660600166X
Don’t buy the article. Google the title.
On a side note, aren’t candlestick patterns Markov chains as their current state influences the probability of the next state?
If you consider, for example a 3 bar moving-window as a single state, then there are known 3 bar patterns with fixed probabilities for predicting the next state.

 

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