Gambler’s ruin problem and bi-directional grid constrained trading and investment strategies

Taranto, Aldo ORCID: https://orcid.org/0000-0001-6763-4997 and Khan, Shahjahan ORCID: https://orcid.org/0000-0002-0446-086X (2020) Gambler’s ruin problem and bi-directional grid constrained trading and investment strategies. Investment Management and Financial Innovations, 17 (3). pp. 54-66. ISSN 1810-4967

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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.


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Item Type: Article (Commonwealth Reporting Category C)
Refereed: Yes
Item Status: Live Archive
Faculty/School / Institute/Centre: Current - Faculty of Health, Engineering and Sciences - School of Sciences (6 Sep 2019 -)
Faculty/School / Institute/Centre: Current - Faculty of Health, Engineering and Sciences - School of Sciences (6 Sep 2019 -)
Date Deposited: 28 Aug 2020 00:30
Last Modified: 31 Aug 2020 04:46
Uncontrolled Keywords: probability, ruin, gambler, semimartingales, martingales, stopping, bi-directional
Fields of Research (2008): 01 Mathematical Sciences > 0104 Statistics > 010406 Stochastic Analysis and Modelling
01 Mathematical Sciences > 0199 Other Mathematical Sciences > 019999 Mathematical Sciences not elsewhere classified
01 Mathematical Sciences > 0103 Numerical and Computational Mathematics > 010301 Numerical Analysis
Fields of Research (2020): 49 MATHEMATICAL SCIENCES > 4905 Statistics > 490510 Stochastic analysis and modelling
49 MATHEMATICAL SCIENCES > 4999 Other mathematical sciences > 499999 Other mathematical sciences not elsewhere classified
49 MATHEMATICAL SCIENCES > 4903 Numerical and computational mathematics > 490302 Numerical analysis
Socio-Economic Objectives (2008): B Economic Development > 89 Information and Communication Services > 8902 Computer Software and Services > 890299 Computer Software and Services not elsewhere classified
Identification Number or DOI: doi:10.21511/imfi.17(3).2020.05
URI: http://eprints.usq.edu.au/id/eprint/39320

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