Markowitz meets technical analysis:  Building optimal portfolios by exploiting information in trend-following signals

André A.P. Santos; Hudson S. Torrent

doi:10.1016/j.frl.2022.103063

Markowitz meets technical analysis: Building optimal portfolios by exploiting information in trend-following signals

André A.P. Santos^*, Hudson S. Torrent

^*Corresponding author for this work

Research output: Contribution to journal › Article › peer-review

Abstract / Description of output

Technical indicators are widely used by market participants to identify trends in asset prices and in trading volumes. However, it is unclear how to reconcile this approach with a portfolio selection policy that guide investment decisions in many assets at the same time. We bridge the gap between Markowitz approach to mean–variance portfolios and technical analysis by devising a portfolio strategy in which optimal weights are directly parameterized as a function of multiple trend-following signals. We present an empirical application in which four commonly used technical indicators are employed to obtain portfolios of all constituents of the S&P500 index.

Original language	English
Article number	103063
Journal	Finance Research Letters
Volume	49
Early online date	17 Jun 2022
DOIs	https://doi.org/10.1016/j.frl.2022.103063
Publication status	Published - Oct 2022

Keywords / Materials (for Non-textual outputs)

bootstrap
parametric portfolios
risk-adjusted performance
transaction costs

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10.1016/j.frl.2022.103063

SantosATorrentHFRL2022MarkowitzMeetsTechnicalAnalysisAccepted author manuscript, 421 KBLicence: Creative Commons: Attribution-NonCommercial-NoDerivatives (CC BY-NC-ND)

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title = "Markowitz meets technical analysis: Building optimal portfolios by exploiting information in trend-following signals",

abstract = "Technical indicators are widely used by market participants to identify trends in asset prices and in trading volumes. However, it is unclear how to reconcile this approach with a portfolio selection policy that guide investment decisions in many assets at the same time. We bridge the gap between Markowitz approach to mean–variance portfolios and technical analysis by devising a portfolio strategy in which optimal weights are directly parameterized as a function of multiple trend-following signals. We present an empirical application in which four commonly used technical indicators are employed to obtain portfolios of all constituents of the S&P500 index.",

keywords = "bootstrap, parametric portfolios, risk-adjusted performance, transaction costs",

author = "Santos, {Andr{\'e} A.P.} and Torrent, {Hudson S.}",

note = "Funding Information: Andre Santos is supported by CNPq - Brazil under grants 420038/2018-3 and 304378/2019-4 . Publisher Copyright: {\textcopyright} 2022 Elsevier Inc.",

year = "2022",

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doi = "10.1016/j.frl.2022.103063",

language = "English",

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journal = "Finance Research Letters",

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T1 - Markowitz meets technical analysis

T2 - Building optimal portfolios by exploiting information in trend-following signals

AU - Santos, André A.P.

AU - Torrent, Hudson S.

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Y1 - 2022/10

N2 - Technical indicators are widely used by market participants to identify trends in asset prices and in trading volumes. However, it is unclear how to reconcile this approach with a portfolio selection policy that guide investment decisions in many assets at the same time. We bridge the gap between Markowitz approach to mean–variance portfolios and technical analysis by devising a portfolio strategy in which optimal weights are directly parameterized as a function of multiple trend-following signals. We present an empirical application in which four commonly used technical indicators are employed to obtain portfolios of all constituents of the S&P500 index.

AB - Technical indicators are widely used by market participants to identify trends in asset prices and in trading volumes. However, it is unclear how to reconcile this approach with a portfolio selection policy that guide investment decisions in many assets at the same time. We bridge the gap between Markowitz approach to mean–variance portfolios and technical analysis by devising a portfolio strategy in which optimal weights are directly parameterized as a function of multiple trend-following signals. We present an empirical application in which four commonly used technical indicators are employed to obtain portfolios of all constituents of the S&P500 index.

KW - bootstrap

KW - parametric portfolios

KW - risk-adjusted performance

KW - transaction costs

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DO - 10.1016/j.frl.2022.103063

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SN - 1544-6123

VL - 49

JO - Finance Research Letters

JF - Finance Research Letters

M1 - 103063

ER -

Markowitz meets technical analysis: Building optimal portfolios by exploiting information in trend-following signals

Abstract / Description of output

Keywords / Materials (for Non-textual outputs)

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