Introducing Subjective Logic in Portfolio Management

Abstract

In this research, we attempt to open a new window in finance by presenting and using the subjective logic. Recently, subjective logic, introduced by Prof. Audun Jøsang in UiO, is presented successfully in different fields of science, but it is not used in finance or economics up to now. To open this new opportunity in finance, we choose to use subjective logic in portfolio management in a simple way to show that it is possible and valuable to employ subjective logic in finance and show how we can do that. Therefore, we choose the momentum strategy which is one of the famous trading strategies to reimplement it by subjective logic and compare their performances. The results show that the subjective logic method can outperform the traditional momentum strategy in most cases, especially for the non-tech companies’ stocks. The subjective logic method can generate relatively higher returns and bring fewer risks than the traditional momentum strategy. This can show that there is a great potential for research and implementation the subjective logic in the financial industry. We hope that the research in this new field continues in the future to employ all capacities of subjective logic in finance. Keywords: Subjective logic, Belief mass, Opinion, Uncertainty, Portfolio management, Momentum Strategy