Monday, May 22, 2017

Developing an automated trading strategy

The aim of this assignment is to construct a trading strategy using the international stock market indices data (from the database provided in the class).

 

The strategy will be based on the returns transmission effects across stock and other asset markets in different geographical zones worldwide. In particular, it will focus on the ?meteor showers? effects of Engle, Ito and Lin.
We will estimate the parameters of the econometric model using MSExcel OLS techniques for the Swiss Stock Exchange and the Dow Jones Industrial Average.
Those results will serve as the base for the construction of a trading strategy and generation of signals for hypothetical trading transactions.

Your job will be to mimic the obtained results based on two financial markets of your choice and simulate the chosen strategy in Excel. In particular, you should do the following:

1- Discuss the econometric model, which you have chosen (we choose SHANGHAI Stock Market) to use for your trading strategy, and the relationships between various stock market indices, which it explains.
2- Calculate overall return from your strategy for the entire period of the experiment (in sample)

 

3- Comment on the obtained results: assess the profitability of the strategy, the stability of the returns etc.
4- Assess the forecasting performance of the model and your strategy: you can use the direction quality measures (or any other measures of forecasting performance, which you find appropriate and can reasonably justify their use).
5- Discuss the obtained results.
6- Implement your trading model outside the sample period and recalculate the overall return from the strategy and the direction quality measures.

 

Compare the performance of your model in sample to out sample.
7- Try to incorporate a second variable into your conditional trading strategy ? ie. Buy the Tadawul only if both the Dow and the oil price both rise the night before.

You can also add additional features of the analysis, such as incorporation and simulation of the transaction costs, filtering of the forecasts, varying the trading amounts etc. This work will receive extra marks.

Note: we choose Shanghai stock market.
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