PID feedback controller used as a tactical asset allocation technique: The G.A.M. model

An Innovative Systematic Approach to Financial Portfolio Management via PID Control

“…During each iteration, the current output is compared to the set-point yielding an error. The goal of the PID control is to diminish this error to the minimum (Gandolfi et al, 2007). The continuous time expression of the PID controller is given by: In this present work, the following recurrence relation, obtained by discrete time formulation and simple-lag implementation of the integral part (Gandolfi et al, 2007) …”

“…The PID (ProportionalIntegral-Derivative) controller is broadly used and implemented in several industrial production plants; "it is been successfully used for over 50 years and it is used by more than 95% of the plants processes. It is a robust and easily understood algorithm, which can provide excellent control performance in spite of the diverse dynamic characteristics of the process plant" (Gandolfi et al, 2007). In industrial environments such as chemical plants, power plants, and engineering industries, numerous processes need to be accurately controlled to conform to the required specifications of the resulting products.…”

“…Others use the spreads between the earning/price ratio of the S&P 500 index and interest rates (Shen, 2003), or present the use of Beta drivers to decide the exposure to the financial market and Alpha drivers to underweight or overweight relative to the benchmark (Anson, 2004). As a final point, a research paper (Gandolfi et al, 2007) pioneers an innovative tactical asset allocation technique. The novelty embedded in this model consists in the application of the well-known PID feedback controlling mechanism, www.intechopen.com used in industrial plant production and engineering, to tactical financial portfolio asset allocation.…”

A Savings Plan With Targeted Contributions

“…This is based on the pension funding method discussed by Owadally () and adapted from industrial process control (Box and Luceño, ). Although we do not consider the asset allocation problem in this article, it is worth noting that Gandolfi, Sabatini and Rossolini () propose a similar method for tactical asset allocation in an investment portfolio.…”

“…Our proposed savings plan is based on a method used in industrial process control (e.g., Box and Luceño, ). The method has also been proposed in the econophysics literature (Gandolfi, Sabatini, and Rossolini, ) and is applied in the pensions literature to defined benefit pension funding with deterministic economic scenarios (Owadally, ). The innovation in this article is to apply this method to a savings problem with a simple stochastic investment environment.…”