Optimal Trading with Linear Costs
| Autor: | Cyril Deremble, Jean-Philippe Bouchaud, Joachim de Lataillade, Marc Potters |
|---|---|
| Jazyk: | angličtina |
| Rok vydání: | 2012 |
| Předmět: |
Transaction cost
Mathematical optimization Threshold limit value Strategy and Management Connection (mathematics) FOS: Economics and business Quadratic equation Portfolio Management (q-fin.PM) Position (vector) Trading strategy Recursion method General Economics Econometrics and Finance Quantitative Finance - Portfolio Management Mathematics |
| Popis: | We consider the problem of the optimal trading strategy in the presence of linear costs, and with a strict cap on the allowed position in the market. Using Bellman's backward recursion method, we show that the optimal strategy is to switch between the maximum allowed long position and the maximum allowed short position, whenever the predictor exceeds a threshold value, for which we establish an exact equation. This equation can be solved explicitely in the case of a discrete Ornstein-Uhlenbeck predictor. We discuss in detail the dependence of this threshold value on the transaction costs. Finally, we establish a strong connection between our problem and the case of a quadratic risk penalty, where our threshold becomes the size of the optimal non-trading band. Submitted to Journal of Investment Strategies |
| Databáze: | OpenAIRE |
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