We present a model of capital allocation in a foreign exchange proprietary trading firm. The owner allocates capital to individual traders, who operate within strict risk limits. Traders specialize in individual currencies, but are given discretion over their choice of trading rule. The owner provides the simple formula that determines position sizes – a formula that does not require estimation of the firm-level covariance matrix. We provide supporting empirical evidence of excess risk-adjusted returns to the firm-level portfolio, and we discuss a modification of the model in which the owner dictates the choice of trading rule.
|Number of pages||12|
|Journal||Journal of Asset Management|
|Early online date||18 Dec 2014|
|Publication status||Published - Jan 2015|
- foreign exchange trading
- technical trading rules
- portfolio management