The Effectiveness Of Different Trading Strategies For Price-Takers
AbstractSimulation models of the stock exchange are developed to explore the dependence between a trader’s ability to predict future price movements and her wealth and probability of bankruptcy, to analyze the consequences of margin trading with different leverage rates and to compare different investment strategies for small traders. We show that in the absence of margin trading the rate of successful predictions should be slightly higher than 50% to guarantee with high probability that the final wealth is greater than the initial and to assure very little probability of bankruptcy, and such a small value explains why so many people try to trade on the stock exchange. However if trader uses margin trading, this rate should be much higher and high rate leads to the risk of excessive losses.
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Bibliographic InfoPaper provided by National Research University Higher School of Economics in its series HSE Working papers with number WP BRP 29/FE/2014.
Length: 30 pages
Date of creation: 2014
Date of revision:
Publication status: Published in WP BRP Series: Financial Economics / FE, April 2014, pages - 30
agent-based system; simulation; stock exchange; trading strategies.;
Find related papers by JEL classification:
- G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
- G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2014-05-04 (All new papers)
- NEP-CMP-2014-05-04 (Computational Economics)
- NEP-MST-2014-05-04 (Market Microstructure)
- NEP-RMG-2014-05-04 (Risk Management)
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