Meta-CTA Trading Strategies based on the Kelly Criterion

TL;DR

This paper models the impact of Kelly-optimized CTA trading strategies on asset prices, revealing predictable dynamics and proposing meta-strategies to exploit or avoid certain market states.

Contribution

It introduces a simple model linking CTA trading behavior with price impact, leading to a phase diagram of market dynamics and meta-strategies for profit optimization.

Findings

Price dynamics depend on model parameters and can be categorized in a phase diagram.

Meta-CTA strategies can exploit predictability by avoiding critical states or taking contrarian positions.

The model demonstrates how CTA activity influences market stability and transitions.

Abstract

The influence of Commodity Trading Advisors (CTA) on the price process is explored with the help of a simple model. CTA managers are taken to be Kelly optimisers, which invest a fixed proportion of their assets in the risky asset and the remainder in a riskless asset. This requires regular adjustment of the portfolio weights as prices evolve. The CTA trading activity impacts the price change in the form of a power law. These two rules governing investment ratios and price impact are combined and lead through updating at fixed time intervals to a deterministic price dynamic. For different choices of the model parameters one gets qualitatively different dynamics. The result can be expressed as a phase diagram. Meta-CTA strategies can be devised to exploit the predictability inherent in the model dynamics by avoiding critical areas of the phase diagram or by taking a contrarian position at an opportune time.