A Discrete-Time State Observer Approach to Discovering Portfolio Holdings

Abstract : This paper is devoted to the derivation of a new approach for discovering mutual fund holdings from returns only. The approach is based on the use of a discrete-time asymptotic observer with forgetting factor which allows to estimate on-line both the holdings and the holding changes in portfolios. A realistic example is also provided, which demonstrates the effectiveness of the proposed approach. To the best of our knowledge, such an approach has never been proposed before.