Generalized framework for applying the Kelly criterion to stock markets

DOI10.1142/S0219024918500334MaRDI QIDQ4584701zbMATH OpenWikidataFDO

Authors Tim Byrnes, Tristan Barnett

Publication date 4 September 2018

Published in International Journal of Theoretical and Applied Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1806.05293

zbMATH Keywords

stock marketsKelly criterionmultivariate portfolios

Mathematics Subject Classification ID

Applications of statistics to actuarial sciences and financial mathematics (62P05) Portfolio theory (91G10)

Abstract: We develop a general framework for applying the Kelly criterion to stock markets. By supplying an arbitrary probability distribution modeling the future price movement of a set of stocks, the Kelly fraction for investing each stock can be calculated by inverting a matrix involving only first and second moments. The framework works for one or a portfolio of stocks and the Kelly fractions can be efficiently calculated. For a simple model of geometric Brownian motion of a single stock we show that our calculated Kelly fraction agrees with existing results. We demonstrate that the Kelly fractions can be calculated easily for other types of probabilities such as the Gaussian distribution and correlated multivariate assets.

Recommendations

• The Kelly Criterion and the Stock Market
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Cites work

• scientific article; zbMATH DE number 3133146 (Why is no real title available?)
• Analysis of Kelly-optimal portfolios
• Capital growth with security
• OPTIMAL INVESTMENT STRATEGIES FOR CONTROLLING DRAWDOWNS
• Optimal strategies for repeated games
• Portfolio choice and the Bayesian Kelly criterion
• Stochastic Dominance among Log-Normal Prospects
• The Kelly Criterion and the Stock Market

Cited in

(6)

• Analysis of Kelly-optimal portfolios
• Implication of the Kelly criterion for multi-dimensional processes
• The Kelly Criterion and the Stock Market
• The Kelly criterion for spread bets
• Kelly gambling with the stock market and banks
• KELLY TRADING AND MARKET EQUILIBRIUM

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