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High-frequency trading with fractional Brownian motion. (English) Zbl 1461.91300

Summary: In the high-frequency limit, conditionally expected increments of fractional Brownian motion converge to a white noise, shedding their dependence on the path history and the forecasting horizon and making dynamic optimisation problems tractable. We find an explicit formula for locally mean-variance optimal strategies and their performance for an asset price that follows fractional Brownian motion. Without trading costs, risk-adjusted profits are linear in the trading horizon and rise asymmetrically as the Hurst exponent departs from Brownian motion, remaining finite as the exponent reaches zero while diverging as it approaches one. Trading costs penalise numerous portfolio updates from short-lived signals, leading to a finite trading frequency, which can be chosen so that the effect of trading costs is arbitrarily small, depending on the required speed of convergence to the high-frequency limit.

MSC:

91G15 Financial markets
60G22 Fractional processes, including fractional Brownian motion
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