A simple scheme for allocating capital in a foreign exchange proprietary trading firm

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Abstract

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.
Original languageEnglish
Pages (from-to)2-13
Number of pages12
JournalJournal of Asset Management
Volume16
Issue number1
Early online date18 Dec 2014
DOIs
Publication statusPublished - Jan 2015

Keywords

  • foreign exchange trading
  • technical trading rules
  • portfolio management

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