Gambler’s ruin problem and bi-directional grid constrained trading and investment strategies
Article
Article Title | Gambler’s ruin problem and bi-directional grid constrained trading and investment strategies |
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ERA Journal ID | 19557 |
Article Category | Article |
Authors | Taranto, Aldo (Author) and Khan, Shahjahan (Author) |
Journal Title | Investment Management and Financial Innovations |
Journal Citation | 17 (3), pp. 54-66 |
Number of Pages | 13 |
Year | 2020 |
Place of Publication | Ukraine |
ISSN | 1810-4967 |
1812-9358 | |
1813-4998 | |
Digital Object Identifier (DOI) | https://doi.org/10.21511/imfi.17(3).2020.05 |
Web Address (URL) | https://businessperspectives.org/journals/investment-management-and-financial-innovations/issue-360/gambler-s-ruin-problem-and-bi-directional-grid-constrained-trading-and-investment-strategies |
Abstract | Bi-Directional Grid Constrained (BGC) trading strategies have never been studied academically until now, are relatively new in the world of financial markets and have the ability to out-perform many other trading algorithms in the short term but will almost surely ruin an investment account in the long term. Whilst the Gambler’s Ruin Problem (GRP) is based on martingales and the established probability theory proves that the GRP is a doomed strategy, this research details how the semimartingale framework is required to solve the grid trading problem (GTP), i.e. a form of BGC financial markets strategies, and how it can deliver greater return on investment (ROI) for the same level of risk. A novel theorem of GTP is derived, proving that grid trading, whilst still subject to the risk of ruin, has the ability to generate significantly more profitable returns in the short term. This is also supported by extensive simulation and distributional analysis. These results not only can be studied within mathematics and statistics in their own right, but also have applications into finance such as multivariate dynamic hedging, investment funds, trading, portfolio risk optimization and algorithmic loss recovery. In today’s uncertain and volatile times, investment returns are between 2%-5% per annum, barely keeping up with inflation, putting people’s retirement at risk. BGC and GTP are thus a rich source of innovation potential for improved trading and investing. |
Keywords | probability, ruin, gambler, semimartingales, martingales,stopping, bi-directional |
ANZSRC Field of Research 2020 | 490510. Stochastic analysis and modelling |
499999. Other mathematical sciences not elsewhere classified | |
490302. Numerical analysis | |
Byline Affiliations | School of Sciences |
Institution of Origin | University of Southern Queensland |
https://research.usq.edu.au/item/q5x02/gambler-s-ruin-problem-and-bi-directional-grid-constrained-trading-and-investment-strategies
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