The Impact of Execution Delay on Kelly-Based Stock Trading: High-Frequency Versus Buy and Hold

Chung-Han Hsieh, B. Ross Barmish and John A. Gubner

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Abstract: Stock trading based on Kelly's celebrated Expected Logarithmic Growth (ELG) criterion, a well-known prescription for optimal resource allocation, has received considerable attention in the literature. Using ELG as the performance metric, we compare the impact of trade execution delay on the relative performance of high-frequency trading versus buy and hold. While it is intuitively obvious and straightforward to prove that in the presence of sufficiently high transaction costs, buy and hold is the better strategy, is it possible that with no transaction costs, buy and hold can still be the better strategy? When there is no delay in trade execution, we prove a theorem saying that the answer is ``no.'' However, when there is delay in trade execution, we present simulation results using a binary lattice stock model to show that the answer can be ``yes.'' This is seen to be true whether self-financing is imposed or not.

Date: 2019-07
New Economics Papers: this item is included in nep-mst
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Published in Proceedings of the IEEE Conference of Decision and Control (CDC), pp. 2580-2585, Nice, France, 2019

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