Constrained Mixture Models for Asset Returns Modelling

Understand

The estimation of asset return distributions is crucial for determining optimal trading strategies.

• In this paper we describe the constrained mixture model, based on a mixture of Gamma and Gaussian distributions, to provide an accurate description of price trends as being clearly positive, negative or ranging while accounting for heavy tails and high kurtosis.
• The model is estimated in the Expectation Maximisation framework and model order estimation also respects the model's constraints.