Trading Gain Research Articles

On Robustness of Double Linear Trading With Transaction Costs

A trading system is said to be {robust} if it generates a robust return regardless of market direction. To this end, a consistently positive expected trading gain is often used as a robustness metric for a trading system. In this paper, we propose a new class of trading policies called the {double linear policy} in an asset trading scenario when the transaction costs are involved. Unlike many existing papers, we first show that the desired robust positive expected gain may disappear when transaction costs are involved. Then we quantify under what conditions the desired positivity can still be preserved. In addition, we conduct heavy Monte-Carlo simulations for an underlying asset whose prices are governed by a geometric Brownian motion with jumps to validate our theory. A more realistic backtesting example involving historical data for cryptocurrency Bitcoin-USD is also studied.

On Feedforward Stock Trading Control Using a New Transaction Level Price Trend Model

In this article, we provide a new Markovian-type model for stock price trend analysis at the transaction level, and illustrate its use for trading in conjunction with a controller, which makes buy and sell decisions. Central to our formulation is a sequence of i.i.d. random variables <inline-formula xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink"><tex-math notation="LaTeX">$T_k$</tex-math></inline-formula> , which corresponds to the number of transactions between reversals in price direction. For a trader, this is an important indicator of the “duration” of a trend. For processes with “large” <inline-formula xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink"><tex-math notation="LaTeX">$T_k$</tex-math></inline-formula> , there is an incentive to try and capitalize by buying stock when a temporary trend is “up” and selling when it is “down.” The extent to which this is possible is determined by a model parameter <inline-formula xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink"><tex-math notation="LaTeX">$p_e$</tex-math></inline-formula> , called the <italic xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink">probability of efficiency</i> , which indicates the likelihood that the bid, ask, and current price are such that one can seamlessly enter or exit the market without slippage. The degree to which a trader can exploit trending behavior is quantified in our main result, which provides the expected value of the trading gain resulting from a strategically constructed feedforward switching controller. This article also includes an example illustrating application of the theory using historical data.

Optimal Distributional Trading Gain: State Price Density Equilibrium and Bayesian Statistics

This paper considers multiple market agents who have distinct distributional opinions about the state price density. We first determine the optimal trading positions of a utility maximizing market taker who trades Arrow-Debreu securities for prices set by the market maker. We use calculus of variations to determine the solution of this problem for a general utility function. The choice of the logarithmic utility function leads to a solution in terms of a likelihood ratio of the densities corresponding to the market taker and the market maker and the resulting optimal utility is the Kullback-Leibler divergence. In particular, we obtain a trivial solution for Merton's portfolio problem in the traditional geometric Brownian motion model and and we show its immediate extension to the multivariate case. A further extension gives a solution for the market driven by a geometric Poisson process. In a market without the market maker, the distributional opinions of market takers reach an equilibrium in the form of the linear mixture of the distributions. We show that when the the result of the outcome is observed, the profit and loss from trading updates agents' bankrolls in a Bayesian fashion, which provides one to one correspondence for the logarithmic utility maximazers' profits and Bayesian statistics. We extend these results to the continuous time setup and show that the bankrolls of agents following Merton optimal portfolio strategy evolve as a posterior distribution.

On Simultaneous Long-Short Stock Trading Controllers with Cross-Coupling

The Simultaneous Long-Short (SLS) controller for trading a single stock is known to guarantee positive expected value of the resulting gain-loss function with respect to a large class of stock price dynamics. In the literature, this is known as the Robust Positive Expectation (RPE) property. An obvious way to extend this theory to the trading of two stocks is to trade each one of them using its own independent SLS controller. Motivated by the fact that such a scheme does not exploit any correlation between the two stocks, we study the case when the relative sign between the drifts of the two stocks is known. The main contributions of this paper are threefold: First, we put forward a novel architecture in which we cross-couple two SLS controllers for the two-stock case. Second, we derive a closed-form expression for the expected value of the gain-loss function. Third, we use this closed-form expression to prove that the RPE property is guaranteed with respect to a large class of stock-price dynamics. When more information over and above the relative sign is assumed, additional benefits of the new architecture are seen. For example, when bounds or precise values for the means and covariances of the stock returns are included in the model, numerical simulations suggest that our new controller can achieve lower trading risk than a pair of decoupled SLS controllers for the same level of expected trading gain.

Network Centrality, Connections, and Information: Evidence from CEO Insider Trading Gains

CEO’s insider trading gains are affected by the position of the CEO within the hierarchy of all executives, as assessed by network centrality. CEOs with high centrality earn superior abnormal returns following their company’s stock purchases, consistent with social capital advantage. Social capital and trading gains are positively associated primarily in firms that are riskier, have weak governance, or are managed by CEOs with no background in finance. High centrality CEOs also gain by selling their shares prior to a bad news event experienced by their firm. Finally, trading gains are positively affected by CEOs having past connections to the CFOs.

On Robustness of Simultaneous Long-Short Stock Trading Control with Time-Varying Price Dynamics

This paper provides a time-varying extension of the so-called Robust Positive Expectation Theorem which arises in the context of Simultaneous Long-Short (SLS) stock trading. In the literature, the original version of the theorem applies to an idealized market with prices governed by a constant-parameter Geometric Brownian Motion (GBM). By this we mean that the process drift µ and voltility σ are time-invariant. In this context, the SLS strategy leads to the guarantee of a positive expected trading gain at every instant of time. In this paper, this result is generalized to GBM price dynamics with these two parameters allowed to be continuously time-varying with no restrictions on their rate of change. The motivation for considering this more general class of stock-price variations is the following: At first glance, it appears that these time-varying price dynamics are “unbeatable” in the sense that there cannot be a stock-trading strategy which still leads to robust positive expectation. In this regard, the “surprising” result in this paper is that the same SLS controller used in the time-invariant case also works in the time-varying case. These results strengthen the case made in earlier literature that linear feedback control in stock trading is worthy of further research.

Stock market forecasting using machine learning with market sentiment

Stock market plays a very important role in economic aspect of the country's growth [6][9], but stock market by its nature is very volatile and complex. It is affected by almost every event be it significant political issues, analyst calls, news articles, company's future plans of expansions and growth and many more. Hence, an investor is always keen in knowing the stock market overtime and how the events mentioned above affect the very behaviour of the stock market. Every day millions of traders invest in stock market[12]. Some of these investors lose money and others gain. However, considering any trading day, loss or gain is absolutely inconsistent. The need to forecast stock prices is very high, hence is the need for stock market analysis [3]. This paper is focused on analysing a stock of any given company based on machine learning algorithms. We try to analyse the underlying price patterns and predict their stock prices based on various situations. Additionally in this paper we try to add the linguistic flavours to already predicted numbers.

Discrete-Time Quadratic-Optimal Hedging for European Contingent Claims

We revisit the problem of optimally hedging a European contingent claim (ECC) using a hedging portfolio consisting of a risky asset that can be traded at pre-specified discrete times. The objective function to be minimized is either the second-moment or the variance of the hedging error calculated in the market probability measure. The main outcome of our work is to show that unique solutions exist in a larger class of admissible strategies under integrability and non-degeneracy conditions on the hedging asset price process that are weaker than previously thought possible. Specifically, we do not require the hedging asset price process to be square-integrable, and do not use the bounded mean-variance trade off assumption. Our criterion for admissible strategies only requires the cumulative trading gain, and not the incremental trading gains, to be square integrable. We derive explicit expressions for the second-moment and the variance of the hedging error to arrive at the respective optimal hedging strategies. We use the expressions mentioned above to also give explicit solutions to two constrained mean-variance frontier problems, namely, minimizing the variance subject to a lower bound on the mean profit, and maximizing the mean profit subject to an upper bound on the variance. Further, we explain the connections between our solution and that of the previous formulations. Finally, we identify the associated variance-optimal martingale measure and provide an expression for the L2-approximation price of the hedged ECC in that measure.

Empirical Case Study of Binary Options Trading

This paper presents an interdisciplinary application of information &amp; communication methodology to financial economics. The empirical case study reported in this contribution consists of a preliminary example of binary options stock trading. The authors have investigated the performance of a simple algorithm which includes one buy/sell order per week. They have analyzed real sets of historical stock quotes, evidencing the asymmetry of achievable economic returns. In fact, the devised algorithm has denoted a (simulated) overall trading gain in the 87% of cases. A discussion, correlating such trend to the typical behavior of occasional traders, is finally reported

Living standards, terms of trade and foreign ownership: reflections on the Australian mining boom*

Australia is experiencing its largest mining boom for more than a century and a half. This paper explores, from a national perspective, important economic differences that arise when a mining boom, such as the current one, is generated by sustained export price increases (trading gains) rather than export volume increases. Since 2003, the terms of trade changes – through their direct trading gain effect and indirect real GDP effects – have increased Australian living standards. The increase, measured from official data and relative to the United States, is about 25 per cent; an increase that probably places Australian living standards well above those of the United States. But official data inadequately adjusts for foreign ownership of mining resources suggesting that this estimate is probably a little too high.

On Stock Trading: Can a Trend Follower Expect to Win?

Our answer to this question is a qualified “yes.” In an idealized market with perfect liquidity, continuous trading and no transaction costs, if a trend follower is a small enough player so as to be a price-taker with adequate resources to avoid margin calls, we rigorously prove that a positive expected value of the trading gain can be guaranteed. Surprisingly, the trend-following trading strategy which we describe, called Simultaneous Long-Short (SLS), is model-free. That is, the trader requires neither an “internal model” for the underlying stock prices nor a behavioral model for the actions of other players in the marketplace. While there are a number of papers in the literature which demonstrate the efficacy of such model-free strategies in an empirical data context via back-testing, to our knowledge, there is a little or no literature which includes a purely theoretical rationale to explain why such methods may work well in practice. The SLS strategy, motivated by ideas in feedback control theory, has the following salient feature: Rather than use of a model of any sort to adjust the amount invested over time, profits and losses are the only factor used for adaptation. More precisely, the number of dollars invested I(t) at time t is adapted as a function of the cumulative gains or losses g(t) on [0, t]. Subsequently, the “power” of our trading scheme is demonstrated using Geometric Brownian Motion for the prices. We include a rather arbitrary time-varying drift μ(t) and a time-varying volatility (t) as well. The class of admissible time variations negates the efficacy of many obvious trading strategies based on estimation of the direction in which the prices are drifting. Despite this lack predictability, we rigorously prove that the SLS trader “expects” to make money on every trade. That is, for any non-trivial price variation and any t > 0, the expected value of the trading gain satisfies E[g(t)] > 0. To our knowledge, such a remarkable property, attainment of performance robustness in a framework without any model to reveal the directional movement of prices, has never been uncovered. We believe that these results may be the “tip of the iceberg” in terms of new research directions aimed at revealing a theory which explains the empirically observed success of trend-following strategies beyond the one considered here.

Measurement of Real Income in the System of National Accounts: An Application to North American Economies

This paper makes use of both output and income statistics derived from the System of National Accounts to examine performance in the three North American countries. In doing so, the paper follows recommendations contained in the System of National Accounts 1993 (SNA 1993) for calculating aggregate real income statistics such as gross national income (GNI) and gross national disposable income (GNDI) rather than aggregate real gross domestic product (GDP), in order to demonstrate the utility of alternate measures for analyzing aggregate economic performance and the standard of living. To move from estimates of GDP to estimates of GNI and GNDI, adjustments are made for changes in relative prices, referred to as a “trading gain” (the combined effect of changes to the terms of trade and changes in the ratio of traded goods prices to non-traded goods prices), and for current account entries other than the trade balance. The paper compares real output and income measures for Mexico, the United States, and Canada. Differences between the GDP and GNDI estimates illustrate the extent to which non-production factors, such as relative price changes, can influence the economic performance of a nation, either as compared to that of other nations or in terms of a nation’s ability to purchase the goods and services its citizens consume. They also illustrate the benefit of using more than one measure when comparing economic performance across countries.

REAL GROSS DOMESTIC INCOME, RELATIVE PRICES, AND ECONOMIC PERFORMANCE ACROSS THE OECD

This paper uses OECD data to examine changes in labor productivity, real gross domestic product (GDP) and real gross domestic income (GDI), economic aggregates, and relative economic growth over time. Real GDI combines changes in production (real GDP) with a trading gain derived from relative price changes. The paper considers two sources of trading gains: the terms of trade, and the real exchange rate. For OECD countries, the terms of trade is the more important price ratio, making a contribution to real income growth that is, on average, an order of magnitude larger than the real exchange rate. Over long time periods, the most important source of real income growth is changes in production. Over shorter time horizons, however, the trading gain can make noteworthy contributions. Changes in aggregates like real private consumption, or the relative economic performance of nations, are shown to be particularly dependent on the trading gain during the large swings in resource prices that occurred post‐2002.

Real Gross Domestic Income, Relative Prices and Economic Performance Across the OECD

This paper uses Organisation for Economic Co-operation and Development (OECD) data to examine changes in labour productivity, real gross domestic product (GDP), real gross domestic income (GDI), economic aggregates and relative economic growth over time. Real GDI combines changes in production (real GDP), with a trading gain derived from relative price changes. The paper considers two sources of trading gains: the terms of trade and the real exchange rate. For OECD countries, the terms of trade is the more important price ratio, making a contribution to real income growth that is, on average, an order of magnitude larger than the real exchange rate. Over long time periods, the most important source of real income growth is changes in production. Over shorter time horizons, however, the trading gain can make noteworthy contributions. Changes in aggregates, like real private consumption or the relative economic performance of nations, are shown to be particularly dependent on the trading gain during the large swings in resource prices that occurred after 2002.

Hot Markets, Investor Sentiment, and IPO Pricing*

We model an IPO company’s optimal response to the presence of sentiment investors. “Regular” investors are allocated stock that they subsequently sell to sentiment investors. Because sentiment demand may disappear prematurely, carrying IPO stock in inventory is risky, so for regulars to break even the stock must be underpriced. The issuer still gains as the offer price capitalizes part of the regulars’ expected trading gain. This resolves the empirical puzzle that issuers do not appear to price their stock aggressively in hot markets. The model generates new refutable predictions regarding the extent of long‐run underperformance, offer size, flipping, and lockups.

What GDP does not Reveal in Analyses of Economic Growth and Real Convergence

The commonly used GDP indicator in real terms does not catch a country trading gain or loss. The real gross domestic income rates of growth, which include the influence of terms of trade changes, were approximately 1 percentage point higher in annual average than the GDP rates in the Czech economy and belonged to the fastest in Central Europe. The real GDP rates of growth do not express the development of real convergence truthfully, too. A familiar statistical paradox in centrally planned economies is presented, as is a new paradox, which occurs in the Slovakian economy in relation to its neighbouring transitional countries. The analysis is also devoted to the relationship between real convergence with real appreciation of currency and with convergence of price levels and to the dissimilar GDP and national income development in the Czech Republic. In the conclusion implications for macroeconomic analysis and economic policy are inferred.

Is Dividend Policy related to Information Asymmetry: Evidence from Insider Trading Gains

The existence and implications of asymmetric in financial markets have been the subject of extensive research in the finance literature. Two of the major propositions in this literature are that (1) corporate insiders take advantage of asymmetric by trading on their informational advantage and (2) dividend policy is related to asymmetric information. It follows there may be a relationship between dividend policy, asymmetric information, and insider trading gains. The purpose of this paper is to examine whether such a relationship exists. There are three theories about dividend policy that motivate this relationship. The first is the free cash flow theory of dividends, which focuses on the divergence of interests between managers and shareholders and on dividends as a disciplining mechanism that reduces the agency costs (see Easterbrook (1984), Jensen (1986)). The second is the institutional monitoring theory based on Allen, Bernardo, and Welch (2000), which focuses on the role of institutions as a monitoring mechanism. The third is the information signaling theory of dividends, which argues that dividend changes reduce asymmetric by acting as a signaling mechanism (See Bhattacharya (1979), Miller and Rock (1985), John and Williams (1985), John and Lang (1991)). This paper uses insider trading gains as a proxy for asymmetry, as well as a variable of interest in its own right, and finds a cross-sectional relationship between dividend policy and asymmetric information/insider trading gains. Using a sample of insider trades from 1982 through 1995, we find that dividend policy is a determinant of insider gains/information asymmetry. First, we find that the higher a firm's dividends, the lower its insider trading gains. Second, we find that whether or not a firm pays dividends is not a determinant of insider gains. Third, we find little evidence that changes in dividend policy affect asymmetry. Thus, we find the evidence is most consistent with the free cash flow theory.

E-commerce and firm bargaining power shift in grocery marketing channels: A case of wholesalers' structured document exchanges

Electronic commerce is transforming interorganizational relationships in marketing channels. Reports frequently note that 'power' goes to those who gain relevant trading information in marketing channels. The paper then asks whether and how structured or 'automated' trading information exchanges (e.g. electronic data interchange (EDI) links) between suppliers and wholesalers impact on their bargaining power in grocery marketing channels. This paper starts with the view that automated information exchanges favour the suppliers because they obtain trading information and gain marketing flexibility more than the wholesalers do. Focusing on the perspective of grocery wholesalers, the paper examines the relationships between (1) EDI use, (2) suppliers' incentives for EDI, (3) wholesalers' perceived bargaining power and (4) trust and cooperation between wholesalers and suppliers. Based on exploratory survey data from 33 grocery wholesalers, the paper finds that automated information exchanges may lower wholesal...