Awareness of Crash Risk Improves Kelly Strategies in Simulated Financial Time Series

@article{Gerlach2020AwarenessOC,
  title={Awareness of Crash Risk Improves Kelly Strategies in Simulated Financial Time Series},
  author={J. C. Gerlach and Jerome Kreuser and Didier Sornette},
  journal={Decision-Making \& Management Science eJournal},
  year={2020}
}
We simulate a simplified version of the price process including bubbles and crashes proposed in Kreuser and Sornette (2018). The price process is defined as a geometric random walk combined with jumps modelled by separate, discrete distributions associated with positive (and negative) bubbles. The key ingredient of the model is to assume that the sizes of the jumps are proportional to the bubble size. Thus, the jumps tend to efficiently bring back excess bubble prices close to a normal or… 
1 Citations

Crash-sensitive Kelly Strategy built on a modified Kreuser-Sornette bubble model tested over three decades of twenty equity indices

We present a modified version of the super-exponential rational expectations “Efficient Crashes” bubble model of (Kreuser and Sornette, 2019) with a different formulation of the expected return that

References

SHOWING 1-10 OF 40 REFERENCES

Super-Exponential RE bubble model with efficient crashes

ABSTRACT We propose a dynamic Rational Expectations (RE) bubble model of prices, combining a geometric random walk with separate crash (and rally) discrete jump distributions associated with positive

Bitcoin Bubble Trouble

We present a dynamic Rational Expectations (RE) bubble model of prices with the intention to evaluate it on optimal investment strategies applied to Bitcoin. Our bubble model is defined as a

Financial Bubbles: Mechanisms and Diagnostics

We define a financial bubble as a period of unsustainable growth, when the price of an asset increases ever more quickly, in a series of accelerating phases of corrections and rebounds. More

Inferring fundamental value and crash nonlinearity from bubble calibration

A series of new models based on the Johansen–Ledoit–Sornette (JLS) model are presented, which is a flexible tool to detect bubbles and predict changes of regime in financial markets and can estimate the fundamental value and the crash nonlinearity.

Detection of Crashes and Rebounds in Major Equity Markets

Financial markets are well known for their dramatic dynamics and consequences that affect much of the world's population. Consequently, much research has aimed at understanding, identifying and

Jump-Diffusion Risk-Sensitive Asset Management I: Diffusion Factor Model

The main result of this paper is to show that the risk-sensitive jump-diffusion problem can be fully characterized in terms of a parabolic Hamilton-Jacobi-Bellman PDE rather than a partial integro-differential equation, and that this PDE admits a classical $(C^{1,2})$ solution.

On Rational Bubbles and Fat Tails

This paper addresses the statistical properties of time series driven by rational bubbles à la Blanchard and Watson (1982). Using insights on the behavior of multiplicative stochastic processes, we

Super-Exponential Growth Expectations and the Global Financial Crisis

We construct risk-neutral return probability distributions from S&P 500 options data over the decade 2003 to 2013, separable into pre-crisis, crisis and post-crisis regimes. The pre-crisis period is