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The Effectiveness Of Different Trading Strategies For Price-Takers

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  • Liudmila G. Egorova

    (National Research University Higher School of Economics)

Abstract

Simulation 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.

Suggested Citation

  • Liudmila G. Egorova, 2014. "The Effectiveness Of Different Trading Strategies For Price-Takers," HSE Working papers WP BRP 29/FE/2014, National Research University Higher School of Economics.
    • Handle: RePEc:hig:wpaper:29/fe/2014
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    File URL: http://www.hse.ru/data/2014/04/21/1319149274/29FE2014.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    agent-based system; simulation; stock exchange; trading strategies.;
    All these keywords.

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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