Optimal Linear Signal: An Unsupervised Machine Learning Framework to Optimize PnL with Linear Signals (2401.05337v1)
Abstract: This study presents an unsupervised machine learning approach for optimizing Profit and Loss (PnL) in quantitative finance. Our algorithm, akin to an unsupervised variant of linear regression, maximizes the Sharpe Ratio of PnL generated from signals constructed linearly from exogenous variables. The methodology employs a linear relationship between exogenous variables and the trading signal, with the objective of maximizing the Sharpe Ratio through parameter optimization. Empirical application on an ETF representing U.S. Treasury bonds demonstrates the model's effectiveness, supported by regularization techniques to mitigate overfitting. The study concludes with potential avenues for further development, including generalized time steps and enhanced corrective terms.
- Johnson, J. (2023). Machine Learning for Financial Market Forecasting. Harvard University.
- Stock Market Prediction Using Machine Learning Techniques: A Decade Survey on Methodologies, Recent Developments, and Future Directions.
- Machine Learning Approaches in Stock Price Prediction: A Systematic Review. Journal of Physics: Conference Series.
- A systematic review of stock market prediction using machine learning and statistical techniques. ScienceDirect, Volume 49, Part 8, Pages 3187-3191.
- Financial Machine Learning. University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2023-100.
- Machine Learning Methods in Finance: Recent Applications and Prospects. Social Science Research Network.
- Stock price prediction using principal components. PLoS ONE, 15(3): e0230124.
- Machine Learning Optimization Algorithms & Portfolio Allocation. arXiv:1909.10233.
- Optimization of investment strategies through machine learning. Procedia Computer Science, 162, 1035-1042.
- Optimization Methods in Finance. Journal of Computational Finance, 21(2), 1-12.
- Optimization Methods in Finance (2nd Edition). Cambridge University Press.
- Deep Stochastic Optimization in Finance.