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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.

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

Keywords

    Research areas

  • foreign exchange trading, technical trading rules, portfolio management

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This work is licensed under a Creative Commons Attribution 3.0 Unported License. The images or other third party material in this article are included in the article’s Creative Commons license, unless indicated otherwise in the credit line; if the material is not included under the Creative Commons license, users will need to obtain permission from the license holder to reproduce the material. To view a copy of this license, visit http://creativecommons.org/licenses/by/3.0/.

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