Seeking Better Sharpe Ratio via Bayesian Optimization

Developing an excellent quantitative trading strategy to obtain a high Sharpe ratio requires optimizing several parameters at the same time. Example parameters include the window length of a moving average sequence, the choice of trading instruments, and the thresholds used to generate trading signals. Simultaneously optimizing all these parameters to seek a high Sharpe ratio is a daunting and time-consuming task, partly because of the unknown mechanism determining the Sharpe ratio. This article proposes using Bayesian optimization to systematically search for the optimal parameter configuration that leads to a high Sharpe ratio. The author shows that the proposed intelligent search strategy performs better than manual search, a common practice that proves to be inefficient. The author’s framework also can easily be extended to other parameter selection tasks in portfolio optimization and risk management.