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

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  • Liehr, Stefan
  • Pawelzik, Klaus

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.

Suggested Citation

  • Liehr, Stefan & Pawelzik, Klaus, 2000. "A trading strategy with variable investment from minimizing risk to profit ratio," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 287(3), pages 524-538.
    • Handle: RePEc:eee:phsmap:v:287:y:2000:i:3:p:524-538
    DOI: 10.1016/S0378-4371(00)00390-3
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    References listed on IDEAS

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    1. Zhang, Yi-Cheng, 1999. "Toward a theory of marginally efficient markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 269(1), pages 30-44.
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    Cited by:

    1. Hui, Eddie C.M. & Chan, Ka Kwan Kevin, 2019. "Alternative trading strategies to beat “buy-and-hold”," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 534(C).

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