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Meta-CTA Trading Strategies based on the Kelly Criterion

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  • Bernhard K. Meister

Abstract

The influence of Commodity Trading Advisors (CTA) on the price process is explored with the help of a simple model. CTA managers are taken to be Kelly optimisers, which invest a fixed proportion of their assets in the risky asset and the remainder in a riskless asset. This requires regular adjustment of the portfolio weights as prices evolve. The CTA trading activity impacts the price change in the form of a power law. These two rules governing investment ratios and price impact are combined and lead through updating at fixed time intervals to a deterministic price dynamic. For different choices of the model parameters one gets qualitatively different dynamics. The result can be expressed as a phase diagram. Meta-CTA strategies can be devised to exploit the predictability inherent in the model dynamics by avoiding critical areas of the phase diagram or by taking a contrarian position at an opportune time.

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  • Bernhard K. Meister, 2016. "Meta-CTA Trading Strategies based on the Kelly Criterion," Papers 1610.10029, arXiv.org.
    • Handle: RePEc:arx:papers:1610.10029
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    File URL: http://arxiv.org/pdf/1610.10029
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