KELLY TRADING AND MARKET EQUILIBRIUM

Author:

BERMIN HANS-PETER1ORCID,HOLM MAGNUS2

Affiliation:

1. Knut Wicksell Centre for Financial Studies, Lund University, Box 7080, S-220 07 Lund, Sweden

2. Hilbert Group, 171 Old Bakery Street, VLT 1455, Malta

Abstract

The Kelly framework is the natural multi-period extension of the one-period mean-variance model of Markowitz in the sense that the efficient frontier is characterized by trading strategies having maximal instantaneous Sharpe ratio. We show that Kelly traders naturally trade in such a way as to induce an equilibrium for the instantaneous covariance matrix. This equilibrium, arising from trading alone, has the property that the equilibrium correlation can be described as the saddle point of a stochastic differential game. However, because the game is not necessarily a zero-sum game the equilibrium volatility is shown to be lower than what is predicted from the game. The covariance equilibrium is fully specified by the rate of logarithmic return, the interest rate and the aggregate willingness to leverage seen in the market.

Publisher

World Scientific Pub Co Pte Ltd

Subject

General Economics, Econometrics and Finance,Finance

Cited by 1 articles. 订阅此论文施引文献 订阅此论文施引文献,注册后可以免费订阅5篇论文的施引文献,订阅后可以查看论文全部施引文献

1. The geometry of risk adjustments;Decisions in Economics and Finance;2023-12-15

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