Predicting Market Data Using The Kalman Filter, Pt 2 by R. Martinelli & N. Rhoads
ARTICLE SYNOPSIS ...Predicting Market Data Using The Kalman Filter, Pt 2 by R. Martinelli & N. Rhoads
Can the Kalman filter be used to predict future price movement? In this second part of this series we answer this question.
Previously, we discussed the Kalman filter and the alpha indicator. This time, we study the accumulation of profit/loss through the fortune chart. We also backtest the filter and analyze the results. The profit/loss on day k may be written as:
Pk = A Wk (yk/yk-1 ? 1)
where the quantity in parentheses is the relative price-change, or return, on day k, A is the trade amount in dollars, an...