Abstract
This paper derives a robust online equity trading algorithm that achieves the greatest possible percentage of the final wealth of the best pairs rebalancing rule in hindsight. A pairs rebalancing r...
Highlights
Literature review The theory of asymptotic portfolio growth was initiated by Kelly (1956), who considered repeated bets on horse races with odds that diverge from the true win probabilities
Set forth the natural goal of optimizing the asymptotic growth rate of one’s capital
The Kelly criterion gives a much more satisfactory answer: bet 50:5% À 49:5% 1⁄4 1% of your wealth. This achieves the capital growth rate of 0:005% per hand played in this situation
Summary
Ordentlich and Cover (1998) super-replicated the final wealth of the best rebalancing rule in hindsight at time-0, they did not use the terminology of financial derivatives so thoroughly. It seems that their paper was not inspired so much by derivative pricing as it was by Shtarkov’s (1987) “universal source code” in information theory. 0 : ðp; θÞ is a super-hedge for some θg Under this terminology, the cost of super-replicating the final wealth of the best rebalancing rule in hindsight (Ordentlich & Cover, 1998) is pðT; mÞ :1⁄4 ∑n1þ...þnm1⁄4T. If three or more distinct horses wind up winning over the T races, every pairs rebalancing rule will eventually go bankrupt, just as soon as a horse other than i or j wins a race
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
