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A simple trading model based on pair pattern strategy space with holding periods is proposed. Power-law behaviors are observed for the return variance $sigma^2$, the price impact $H$ and the predictability $K$ for both models with linear and square root impact functions. The sum of the traders wealth displays a positive value for the model with square root price impact function, and a qualitative explanation is given based on the observation of the conditional excess demand $<A|u>$. An evolutionary trading model is further proposed, and the elimination mechanism effectively changes the behavior of the traders highly performed in the model without evolution. The trading model with other types of traders, e.g., traders with the MGs strategies and producers, are also carefully studied.
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The influence of Commodity Trading Advisors (CTA) on the price process is explored with the help of a simple model. CTA managers are taken to be Kelly optimisers, which invest a fixed proportion of their assets in the risky asset and the remainder in a riskless asset. This requires regular adjustment of the portfolio weights as prices evolve. The CTA trading activity impacts the price change in the form of a power law. These two rules governing investment ratios and price impact are combined and lead through updating at fixed time intervals to a deterministic price dynamic. For different choices of the model parameters one gets qualitatively different dynamics. The result can be expressed as a phase diagram. Meta-CTA strategies can be devised to exploit the predictability inherent in the model dynamics by avoiding critical areas of the phase diagram or by taking a contrarian position at an opportune time.
An investor trades a safe and several risky assets with linear price impact to maximize expected utility from terminal wealth. In the limit for small impact costs, we explicitly determine the optimal policy and welfare, in a general Markovian setting allowing for stochastic market, cost, and preference parameters. These results shed light on the general structure of the problem at hand, and also unveil close connections to optimal execution problems and to other market frictions such as proportional and fixed transaction costs.
We propose a simple SIR model in order to investigate the impact of various confinement strategies on a most virulent epidemic. Our approach is motivated by the current COVID-19 pandemic. The main hypothesis is the existence of two populations of susceptible persons, one which obeys confinement and for which the infection rate does not exceed 1, and a population which, being non confined for various imperatives, can be substantially more infective. The model, initially formulated as a differential system, is discretised following a specific procedure, the discrete system serving as an integrator for the differential one. Our model is calibrated so as to correspond to what is observed in the COVID-19 epidemic. Several conclusions can be reached, despite the very simple structure of our model. First, it is not possible to pinpoint the genesis of the epidemic by just analysing data from when the epidemic is in full swing. It may well turn out that the epidemic has reached a sizeable part of the world months before it became noticeable. Concerning the confinement scenarios, a universal feature of all our simulations is that relaxing the lockdown constraints leads to a rekindling of the epidemic. Thus we sought the conditions for the second epidemic peak to be lower than the first one. This is possible in all the scenarios considered (abrupt, progressive or stepwise exit) but typically a progressive exit can start earlier than an abrupt one. However, by the time the progressive exit is complete, the overall confinement times are not too different. From our results, the most promising strategy is that of a stepwise exit. And in fact its implementation could be quite feasible, with the major part of the population (minus the fragile groups) exiting simultaneously but obeying rigorous distancing constraints.
We study the continuous time portfolio optimization model on the market where the mean returns of individual securities or asset categories are linearly dependent on underlying economic factors. We introduce the functional $Q_gamma$ featuring the expected earnings yield of portfolio minus a penalty term proportional with a coefficient $gamma$ to the variance when we keep the value of the factor levels fixed. The coefficient $gamma$ plays the role of a risk-aversion parameter. We find the optimal trading positions that can be obtained as the solution to a maximization problem for $Q_gamma$ at any moment of time. The single-factor case is analyzed in more details. We present a simple asset allocation example featuring an interest rate which affects a stock index and also serves as a second investment opportunity. We consider two possibilities: the interest rate for the bank account is governed by Vasicek-type and Cox-Ingersoll-Ross dynamics, respectively. Then we compare our results with the theory of Bielecki and Pliska where the authors employ the methods of the risk-sensitive control theory thereby using an infinite horizon objective featuring the long run expected growth rate, the asymptotic variance, and a risk-aversion parameter similar to $gamma$.
We consider a basic model of multi-period trading, which can be used to evaluate the performance of a trading strategy. We describe a framework for single-period optimization, where the trades in each period are found by solving a convex optimization problem that trades off expected return, risk, transaction cost and holding cost such as the borrowing cost for shorting assets. We then describe a multi-period version of the trading method, where optimization is used to plan a sequence of trades, with only the first one executed, using estimates of future quantities that are unknown when the trades are chosen. The single-period method traces back to Markowitz; the multi-period methods trace back to model predictive control. Our contribution is to describe the single-period and multi-period methods in one simple framework, giving a clear description of the development and the approximations made. In this paper we do not address a critical component in a trading algorithm, the predictions or forecasts of future quantities. The methods we describe in this paper can be thought of as good ways to exploit predictions, no matter how they are made. We have also developed a companion open-source software library that implements many of the ideas and methods described in the paper.
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