Constructing the Best Trading Strategy: A New General Framework

33 Pages Posted: 28 Jul 2011 Last revised: 12 Oct 2011

Philip Maymin

University of Bridgeport - School of Business; Vantage Sports

Zakhar Maymin

Independent

Date Written: October 11, 2011

Abstract

We introduce a new general framework for constructing the best trading strategy for a given historical indicator. We construct the unique trading strategy with the highest expected return. This optimal strategy may be implemented directly, or its expected return may be used as a benchmark to evaluate how far away from the optimal other proposed strategies for the given indicators are. Separately, we also construct the unique trading strategy with the highest information ratio. In the normal case, when the traded security return is near zero, and for reasonable correlations, the performance differences are economically insignificant. However, when the correlation approaches one, the trading strategy with the highest expected return approaches its maximum information ratio of 1.32 while the trading strategy with the highest information ratio goes to infinity.

Keywords: trading strategy, conditional, portfolio management, optimal, indicators

JEL Classification: G11, G14, G17

Suggested Citation

Maymin, Philip and Maymin, Zakhar, Constructing the Best Trading Strategy: A New General Framework (October 11, 2011). Available at SSRN: https://ssrn.com/abstract=1896146 or http://dx.doi.org/10.2139/ssrn.1896146

Philip Maymin (Contact Author)

University of Bridgeport - School of Business ( email )

126 Park Avenue
Bridgeport, CT 06601
United States

Vantage Sports ( email )

United States

Zakhar Maymin

Independent ( email )

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