Investment Strategies and Hidden Variables

19 Pages Posted: 26 Jan 2006

See all articles by Filippo Petroni

Filippo Petroni

Universita' di L'Aquila

Maurizio Serva

University of L'Aquila - Department of Physics

Date Written: 2006

Abstract

The present study shows how the information on 'hidden' market variables effects optimal investment strategies. We take the point of view of two investors, one who has access to the hidden variables and one who only knows the quotes of a given asset. Following Kelly's theory on investment strategies, the Shannon information and the doubling investment rate are quantified for both investors. Thanks to his privileged knowledge, the first investor can follow a better investment strategy. Nevertheless, the second investor can extract some of the hidden information looking at the past history of the asset variable. Unfortunately, due to the complexity of his strategy, this investor will have computational difficulties when he tries to apply it. He will than follow a simplified strategy, based only on the average sign of the last $l$ quotes of the asset. This results have been tested with some Monte Carlo simulations.

Keywords: Investment strategies, hidden variable, information

Suggested Citation

Petroni, Filippo and Serva, Maurizio, Investment Strategies and Hidden Variables (2006). Available at SSRN: https://ssrn.com/abstract=878044 or http://dx.doi.org/10.2139/ssrn.878044

Filippo Petroni (Contact Author)

Universita' di L'Aquila ( email )

Dipartimento di Matematica
Coppito, L'Aquila 67010
Italy

Maurizio Serva

University of L'Aquila - Department of Physics ( email )

Coppito di L'Aquila, 67010
Italy
+39 862 43 3153 (Phone)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
106
Abstract Views
814
rank
313,352
PlumX Metrics