B. Ross Barmish
University of Wisconsin, Madison
This talk begins with a description of some ideas related to gambling which originated at Bell Labs in the 1950s by John Kelly and Claude Shannon. With their work serving as motivation for this talk, I will provide an overview of my research on the development of new stock-trading algorithms. The most salient feature of my approach is that no model of any sort is used for the underlying stock-price dynamics. Instead, in the spirit of technical analysis, the size of the time-varying stock position is determined using some simple ideas involving the adaptive power of feedback control loops. This approach is said to be “reactive” rather than predictive and amounts to assigning high priority to sound money management. After the key ideas driving this research are explained, the back-testing of the trading algorithms using historical data will be addressed with attention paid to practical considerations such as transaction costs, leverage and margin. It is interesting to note that sometimes the simulations lead to unexpected results which were not contemplated during the course of the research.