Optimal Trading Strategies for Ito Diffusion Processes

Physica A: Statistical Mechanics and its Applications, Vol. 388, pp. 2865-2873, 2009

17 Pages Posted: 2 Apr 2009 Last revised: 11 May 2009

Abstract

In this paper we present a method for determining optimal trading strategies for Ito diffusion processes. By framing the problem in terms of the first passage time for the process we derive distribution and density functions for the trade length and use these functions to calculate the expected trading frequency for the strategy. The expected value and the variance of the rate of profit are obtained as functions of the return per trade and trading frequency. We present two measures for trade drawdown which may be used as constraints when determining an optimal strategy. The optimal strategy is calculated for the Ornstein-Uhlenbeck process by maximising the expected rate of profit.

Keywords: Econophysics, Stochastic Processes, Passage Time

JEL Classification: C6, C0

Suggested Citation

Bertram, William Karel, Optimal Trading Strategies for Ito Diffusion Processes. Physica A: Statistical Mechanics and its Applications, Vol. 388, pp. 2865-2873, 2009 , Available at SSRN: https://ssrn.com/abstract=1371903

William Karel Bertram (Contact Author)

ITG Australia Limited ( email )

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