Author(s)

O.H. Criner

Abstract

The problem: given only historical trading price-time data for the formally traded financial instrument of interest (portfolio), what trading decisions should be made at the current point in time so that the chosen performance measure of the portfolio is maximized? Advancing computing technology has encouraged development of an extremely large number of computational tools to solve this problem. Most of these tools employ pattern recognition, moving averages, or neural nets. Few, if any, attempts have been made to cast the problem into a single consistent theoretical framework. We use the theory of optimal control of differential equations as the framework and seek an inverse solution for the controller. Given a price-time trajectory, we seek the policies that optimize performance over that trajectory. Assuming that the behavior continues

Keywords