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: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Institutional Investors and Equity Prices
By Paul A. Gompers and Andrew Metrick
-
New Evidence on Stock Price Effects Associated with Charges in the S&P 500 Index
-
Limited Arbitrage in Mergers and Acquisitions
By Malcolm P. Baker and Serkan Savasoglu
-
The Demand for Stocks: An Analysis of IPO Auctions
By Shmuel Kandel (deceased), Oded Sarig, ...
-
Arbitrage Risk and the Book-to-Market Anomaly
By Ashiq Ali, Lee-seok Hwang, ...