Journal of Investment Strategies

Risk.net

Optimal trading with linear costs

Joachim De Lataillade, Cyril Deremble, Marc Potters and Jean-Philippe Bouchaud

ABSTRACT

We address the problem of finding the optimal trading strategy where linear costs apply, with a strict cap on the position allowed in the market. Using Bellman's backward recursion method, we show that the optimal strategy is to switch between the maximum allowed long position and the maximum allowed short position whenever the predictor exceeds a threshold value, for which we establish an exact equation. This equation can be solved explicitly in the case of a discrete Ornstein-Uhlenbeck predictor.We discuss in detail the dependence of this threshold value on transaction costs. Finally, we establish a strong connection between our problem and the case of a quadratic risk penalty, where our threshold becomes the size of the optimal nontrading band.

To continue reading...

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an indvidual account here: