Optimal trading from minimizing the period of bankruptcy risk |
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| Authors: | S. Liehr K. Pawelzik |
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| Affiliation: | (1) Institute of Theoretical Physics, University of Bremen, Kufsteiner Str., Room M 3210, 28334 Bremen, Germany, DE |
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| Abstract: | Assuming that financial markets behave similar to random walk processes we derive a trading strategy with variable investment which is based on the equivalence of the period of bankruptcy risk and the risk to profit ratio. We define a state dependent predictability measure which can be attributed to the deterministic and stochastic components of the price dynamics. The influence of predictability variations and especially of short term inefficiency structures on the optimal amount of investment is analyzed in the given context and a method for adaptation of a trading system to the proposed objective function is presented. Finally we show the performance of our trading strategy on the DAX and S&P 500 as examples for real world data using different types of prediction models in comparison. Received 15 September 2000 and Received in final form 2 October 2000 |
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| Keywords: | PACS. 89.90.+n Other topics in areas of applied and interdisciplinary physics – 02.50.Ey Stochastic processes – 05.45.Tp Time series analysis |
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