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Optimal trading from minimizing the period of bankruptcy risk

Author

Listed:
  • S. Liehr

    (Institute of Theoretical Physics, University of Bremen, Kufsteiner Str., Room M 3210, 28334 Bremen, Germany)

  • K. Pawelzik

    (Institute of Theoretical Physics, University of Bremen, Kufsteiner Str., Room M 3210, 28334 Bremen, Germany)

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.

Suggested Citation

  • S. Liehr & K. Pawelzik, 2001. "Optimal trading from minimizing the period of bankruptcy risk," The European Physical Journal B: Condensed Matter and Complex Systems, Springer;EDP Sciences, vol. 20(4), pages 555-559, April.
    • Handle: RePEc:spr:eurphb:v:20:y:2001:i:4:d:10.1007_s100510170239
    DOI: 10.1007/s100510170239
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