A control theorist crashes the market

Posted on 27. Sep, 2013 by in Academic Departments, Annual Report, Electrical and Computer Engineering, Issues, Research

Bob Barmish

Bob Barmish. Photo: Scott Gordon

Electrical and Computer Engineering Professor B. Ross Barmish hopes his current National Science Foundation-funded research will build a bridge between control theorists and financial scholars.

Barmish starts with notions that defy the predictive statistical approach by which financial scholars tend to swear. “Instead of using statistics and saying, ‘Well, something worked in the past,’ I say, ‘No, here’s a theoretical basis that doesn’t depend on the past or future,’” Barmish says.

Enter control theory, a field of applied mathematics that has addressed the control and stability of systems ranging from physical machinery to economics. Barmish is particularly interested in “robustness”—the ability of a system or approach to hold up under uncertainty and disturbances.

It’s easy to see, then, why he’d be drawn to the volatile and complex world of financial markets.

The day-to-day work of his current research involves running simulations of what returns a control-theory approach might yield with certain stocks. Barmish models a trader’s decisions as a sort of feedback loop, responding to returns on investment with patterns determined by various algorithms. To simplify it greatly, sometimes this can mean investing more money as returns increase, or investing less as returns decrease.

The IEEE Control Systems Society has awarded Barmish the 2013 Henrik W. Bode Lecture Prize, which recognizes distinguished contributions to control systems science or engineering. In his abstract for the Bode lecture, which he’ll deliver in December 2013 at the IEEE Conference on Decision and Control in Florence, Italy, he boldly proposes a new theoretical framework for stock trading.

Barmish’s ultimate goal isn’t to give traders new “market-beating” tricks, he says, but to show that control theory can explain strategies that previously have been studied only in a statistical framework. “My accountability has to be to the application area,” he says.

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