11 votes
Accepted

James Simons (Renaissance Technologies Corp.) and his model

In 1983 he was using Hidden Markov Models. Now he employs 100+ PhDs, therefore I expect he will have 50+ strategies using 200+ predictors. And set up as a production line, from the teams importing and ...
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  • 4,227
3 votes
Accepted

Optimal trading strategy in toy world of simple Hidden Markov model with Gaussians

I don't understand how technical indicators are at all relevant to the question. State probabilities can be generated directly from the returns if the model is known. There is no need to guess at ...
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  • 537
3 votes

Why do we make the Markov assumption on financial markets?

The markov property imposes a form of unpredictability on price dynamics within financial models. As you noted, if this was exactly true, technical traders would effectively be wasting their time. ...
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  • 2,366
3 votes
Accepted

When predicting Forex price using HMM what, typically, are the states and what are the observations?

Your decision. You can define the states to be "positive return" or "negative return". So if the return is negative, then its state would be that "negative return". Or, you could even model them ...
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  • 46
3 votes
Accepted

MSGARCH package on R

For a more readable output of the fit you can use the function summary(): ...
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3 votes

Asset allocation problem using Hidden Markov Model

The basic approach is as follows: When you estimate the HMM you estimate three things: When you are in which state The drifts of your assets The covariance matrices of your assets You would then ...
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  • 27k
2 votes

Kalman filtering

In the paper you cited in the question, the equation (1) is not the equation of state in kalman filter model, but an $AR(3)$ estimated via OLS as shown in Stock & Watson (2002). What the authors ...
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  • 2,446
2 votes

predict next day's close price using hmm

I cannot seem to find that article for free, so here is a more generalized answer. 1.what are the hidden states and what are the observation states. The hidden states are said to be that of an ...
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1 vote

Asset allocation problem using Hidden Markov Model

I don't think you'll find anything. Why don't you contact the authors? They must have some code to generate the HMM simulations in the paper, maybe they can share the code with you? Have you checked ...
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  • 2,255
1 vote

Regime switching model getting data

I think the VIX index is a good example of what you are looking for.
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  • 266
1 vote

Kalman filtering

It is not about estimating those equations via PC. There are various methods to estimate the latent factor fth, one of which is principal components. They have asked us to use that. Series(z) in those ...
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  • 11
1 vote

Hidden Markov Models methods for selecting optimal number of states

Besides using the valuable domain knowledge given in other answer(s) to determine the optimal number of states, and furthermore as an alternative to using the AIC or BIC, we can consider Bayesian ...
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