IDEAS home Printed from https://ideas.repec.org/p/arx/papers/2508.18868.html
   My bibliography  Save this paper

Tackling estimation risk in Kelly investing using options

Author

Listed:
  • Fabrizio Lillo
  • Piero Mazzarisi
  • Ioanna-Yvonni Tsaknaki

Abstract

The Kelly criterion provides a general framework for optimizing the growth rate of an investment portfolio over time by maximizing the expected logarithmic utility of wealth. However, the optimality condition of the Kelly criterion is highly sensitive to accurate estimates of the probabilities and investment payoffs. Estimation risk can lead to greatly suboptimal portfolios. In a simple binomial model, we show that the introduction of a European option in the Kelly framework can be used to construct a class of growth optimal portfolios that are robust to estimation risk.

Suggested Citation

  • Fabrizio Lillo & Piero Mazzarisi & Ioanna-Yvonni Tsaknaki, 2025. "Tackling estimation risk in Kelly investing using options," Papers 2508.18868, arXiv.org.
    • Handle: RePEc:arx:papers:2508.18868
    as

    Download full text from publisher

    File URL: http://arxiv.org/pdf/2508.18868
    File Function: Latest version
    Download Restriction: no
    ---><---

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:arx:papers:2508.18868. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: arXiv administrators (email available below). General contact details of provider: http://arxiv.org/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.