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Parameter‐based Decision Making under Estimation Risk: An Application to Futures Trading
Author(s) -
LENCE SERGIO H.,
HAYES DERMOT J.
Publication year - 1994
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.1540-6261.1994.tb04434.x
Subject(s) - futures contract , portfolio , estimation , sample (material) , econometrics , pairs trade , actuarial science , trading strategy , computer science , economics , financial economics , algorithmic trading , alternative trading system , chemistry , management , chromatography
This study shows how the standard portfolio model of futures trading should be modified when there is less than perfect information about the relevant parameters (estimation risk). The standard and the optimal decision rules for futures trading in the presence of estimation risk are compared and discussed. An operational model of futures trading for use under estimation risk is advanced. In the presence of relevant prior and sample information, the model can be used to optimally blend both types of information.