Bayesian Stability Filtrations: Indicators, Signal Strengths, and Position Thresholds

In this report we describe financial indicators, signal strength, and position thresholds based on a Bayesian Stability approach. The measures are used to rebalance investments with the goal to achieve steady increases in the returns, and low drawdowns with short recovery times.

The Bayesian Stability Analysis as introduced by Würtz et al. [2010] is an application that allows to analyze performance, risk, and stability issues of financial investments. We discuss in this report how one can apply the Bayesian Change Point (BCP) approach of Barry and Hartigan [1992, 1993] and how one can derive from it indicators and signals for decision taking. The major goal is to achieve investments with a steady increase in the wealth and with low drawdowns and short recovery times.