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Solution Design Document

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Suman Dutta
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41 views2 pages

Solution Design Document

Uploaded by

Suman Dutta
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Solution Design Document (SDD)

Project Title: Long-Term Investment Strategy Using Mean Reversion in Stocks

Purpose:

The goal of this project is to create and improve an long term investment strategy using a well know
technique in financial market called "mean reversion." This strategy is based on the idea that stock
prices tend to return to their mean over a longer horizon of time. By using this approach, the aim is to
find the right balance between good return and managing risk.

Project Scope:

1. Identifying Patterns: We will look for patterns in stock prices that show they tend to return to
an average level.

2. Building the Portfolio: We will use these to build a mean reverting portfolio which will give
better return in a long-term horizon.

3. Testing the Strategy: We will test how the strategy has worked in the past using historical stock
price data.

Audience:

This project is designed for a wide range of people: Academics, Financial Analysts, Industry Professional,
Potential Employers.

High-Level Overview:

1. Getting the Data:

o We will collect past stock prices from sources like Yahoo Finance.

o We use simple tools in Python to get and organize this data.

2. Testing for Mean Reversion:

o We will run tests to see if stock prices really do tend to go back to their average.

o We use some mathematical tests to check for these patterns.

3. Using Machine Learning:

o We apply advanced techniques to predict how the stocks might behave.

o We use tools like TensorFlow to help with these predictions.

4. Statistical Modeling:

o We use models to better understand the behavior of the stocks in our portfolio.

o We apply some well-known methods like ARIMA, GARCH, EWMA to analyze the data.

5. Managing the Portfolio:


o We create and regularly adjust the collection of stocks based on what we learn.

o We use optimization techniques to make the portfolio as strong as possible.

6. Evaluating Performance:

o We check how well the strategy works by seeing how it would have performed in the
past.

Technology Stack: Programming Language [Python], Machine Learning Tools [TensorFlow, Scikit-learn],
Statistical Tools [ARIMA, GARCH, and others for analyzing stock behavior]

Key Functional Requirements:

1. Creating Models: Develop methods to predict when stock prices will return to their average.

2. Building a Strategy: Use these predictions to manage a portfolio that balances growth and risk.

3. Testing the Strategy: Test how the strategy would have performed using past data.

Risks and Solutions:

 Market Changes: The strategy may not work well if the market does not follow a mean-
reversion pattern. Hence, Diversify the portfolio and use safety measures.

 Model Overfitting: The models might work too well on past data but fail in the future. Use
techniques to prevent overfitting.

 Data Issues: Bad data could lead to wrong decisions. Use multiple sources and clean the data
thoroughly.

Conclusion:

This project offers a well-thought-out approach to long-term investing in stocks. It combines solid
analysis with advanced techniques and is designed to be flexible and secure. We recommend moving
forward with developing and deploying this strategy.

Next Steps:

Consider real-world constraints to make the strategy more practical. Apply the strategy to different
types of investments. Use more advanced techniques to make better predictions. Explore how the
strategy could work with other types of investments. Build a system to automatically apply the strategy
in real-time. Continue testing to ensure the strategy works well in the real world.

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