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

Antony Jackson

doi:10.1057/jam.2014.40

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

Antony Jackson

School of Economics

Research output: Contribution to journal › Article › peer-review

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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 language	English
Pages (from-to)	2-13
Number of pages	12
Journal	Journal of Asset Management
Volume	16
Issue number	1
Early online date	18 Dec 2014
DOIs	https://doi.org/10.1057/jam.2014.40
Publication status	Published - Jan 2015

Keywords

foreign exchange trading
technical trading rules
portfolio management

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10.1057/jam.2014.40Licence: CC BY

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http://www.palgrave-journals.com/jam/journal/vaop/ncurrent/full/jam201440a.htmlLicence: CC BY

Cite this

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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.",

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