The use of investment portfolio orthogonality to secure investment against bank interventions

Abstract

Addressing risk from price fluctuations is usual for traders in finance markets, but interventions from banks are extreme and unpredictable. The principle of portfolio orthogonality was investigated as one way of securing investment in the face of interventions in financial markets. The research tested two forecasting tools: the adequate portfolio model and an ensemble of Evolino recurrent neural networks. The paper draws on different investment portfolios in global capital and foreign exchange markets to illustrate the potential of investment portfolio orthogonality. Banking interventions are relatively rare phenomena which have an impact on the security of investment. The investment portfolio orthogonality principle can be used as a tool to protect against unexpected losses.