A trading strategy with variable investment from minimizing risk to profit ratio

Stefan Liehr and Klaus Pawelzik

Physica A: Statistical Mechanics and its Applications, 2000, vol. 287, issue 3, 524-538

Abstract: Assuming that financial markets behave similar to non-stationary random walk processes we derive an optimal trading strategy with variable investment for minimizing the risk to profit ratio over the trading period. We define a predictability measure which can be attributed to the deterministic and stochastic components of the price dynamics. The influence of predictability variations and especially of structures of short-term inefficiencies on the optimal amount of investment is analyzed in the given context. Finally, we show the performance of our trading strategy on an artificial price dynamics and on the DAX and S&P 500 as examples for real-world data using different types of prediction models in comparison.

Keywords: Non-stationary random walk; Optimal trading strategy; Variable investment; Sharpe ratio; Prediction; Neural networks (search for similar items in EconPapers)
Date: 2000
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:287:y:2000:i:3:p:524-538

DOI: 10.1016/S0378-4371(00)00390-3

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