A trader with initial capital c believes that investors overreact to news, causing an asset to...
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A trader with initial capital c believes that investors overreact to news, causing an asset to follow the mean-reverting AR(1) process R - µ = -X(R-1 - µ) + oz4 where the constants A, o > 0. The z ~ (0, 1) are a set of IID Gaussian random variables with zero mean and unit variance. The trader pursues a contrarian strategy by investing an amount of capital I = -cR at the end of each period (i.e., as soon as R, has been observed). Negative values of I correspond to short positions. During the next time period, the asset earns a return R4+1, assuming no transaction costs. The trader closes the position and opens a new one, repeating the process. Therefore, at the end of each trading day, the strategy P/L is given by T = I-1R4 Part A Compute the expectation E T] of each period's P/L. Express your ver in terms of c, lambda for , sigma for o, and mu for u, as needed. E [Tt] = A trader with initial capital c believes that investors overreact to news, causing an asset to follow the mean-reverting AR(1) process R - µ = -X(R-1 - µ) + oz4 where the constants A, o > 0. The z ~ (0, 1) are a set of IID Gaussian random variables with zero mean and unit variance. The trader pursues a contrarian strategy by investing an amount of capital I = -cR at the end of each period (i.e., as soon as R, has been observed). Negative values of I correspond to short positions. During the next time period, the asset earns a return R4+1, assuming no transaction costs. The trader closes the position and opens a new one, repeating the process. Therefore, at the end of each trading day, the strategy P/L is given by T = I-1R4 Part A Compute the expectation E T] of each period's P/L. Express your ver in terms of c, lambda for , sigma for o, and mu for u, as needed. E [Tt] =
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Financial Accounting an introduction to concepts, methods and uses
ISBN: 978-0324789003
13th Edition
Authors: Clyde P. Stickney, Roman L. Weil, Katherine Schipper, Jennifer Francis
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