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The Expected Utility of the Doubling Strategy
Author(s) -
OMBERG EDWARD
Publication year - 1989
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1989.tb05071.x
Subject(s) - counterexample , mathematical economics , function (biology) , arbitrage , class (philosophy) , expected utility hypothesis , variety (cybernetics) , mathematical optimization , isoelastic utility , trading strategy , economics , computer science , mathematics , econometrics , finance , discrete mathematics , artificial intelligence , evolutionary biology , biology
It has been noted that a certain continuous‐time trading strategy, termed the “doubling strategy”, generates a positive net return on borrowed funds, with probability one and within a finite period of time. Since the doubling strategy seems to represent a “free lunch” or arbitrage opportunity, a variety of constraints to render it infeasible have been proposed. In this paper, we show that the doubling strategy generates infinite disutility for a large class of utility functions, and we can think of no utility function for a risk‐averse agent which is a counterexample.