Hidden Markov Models Applied To Intraday Momentum Trading With Side Information

A Hidden Markov Model for intraday momentum trading is presented which specifies a latent momentum state responsible for generating the observed securities' noisy returns. Existing momentum trading models suffer from time-lagging caused by the delayed frequency response of digital filters. Time-lagging results in a momentum signal of the wrong sign, when the market changes trend direction. A key feature of this state space formulation, is no such lagging occurs, allowing for accurate shifts in s...