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A Generalized Framework for Simultaneous Long-Short Feedback Trading

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  • Joseph D. O'Brien
  • Mark E. Burke
  • Kevin Burke

Abstract

We present a generalization of the Simultaneous Long-Short (SLS) trading strategy described in recent control literature wherein we allow for different parameters across the short and long sides of the controller; we refer to this new strategy as Generalized SLS (GSLS). Furthermore, we investigate the conditions under which positive gain can be assured within the GSLS setup for both deterministic stock price evolution and geometric Brownian motion. In contrast to existing literature in this area (which places little emphasis on the practical application of SLS strategies), we suggest optimization procedures for selecting the control parameters based on historical data, and we extensively test these procedures across a large number of real stock price trajectories (495 in total). We find that the implementation of such optimization procedures greatly improves the performance compared with fixing control parameters, and, indeed, the GSLS strategy outperforms the simpler SLS strategy in general.

Suggested Citation

  • Joseph D. O'Brien & Mark E. Burke & Kevin Burke, 2018. "A Generalized Framework for Simultaneous Long-Short Feedback Trading," Papers 1806.05561, arXiv.org, revised Aug 2020.
    • Handle: RePEc:arx:papers:1806.05561
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    File URL: http://arxiv.org/pdf/1806.05561
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    References listed on IDEAS

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    1. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    2. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
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    Cited by:

    1. Chung-Han Hsieh & Xin-Yu Wang, 2023. "Robust Trading in a Generalized Lattice Market," Papers 2310.11023, arXiv.org.
    2. Chung-Han Hsieh, 2022. "On Robustness of Double Linear Trading with Transaction Costs," Papers 2209.12383, arXiv.org.
    3. Xin-Yu Wang & Chung-Han Hsieh, 2023. "On Robustness of Double Linear Policy with Time-Varying Weights," Papers 2303.10806, arXiv.org.
    4. Chung-Han Hsieh, 2022. "On Robust Optimal Linear Feedback Stock Trading," Papers 2202.02300, arXiv.org.
    5. Michael Heinrich Baumann, 2022. "Beating the market? A mathematical puzzle for market efficiency," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 45(1), pages 279-325, June.

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