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arXiv · 1901.02480

On Positive Solutions of a Delay Equation Arising When Trading in Financial Markets

Chung-Han Hsieh·B. Ross Barmish·John A. Gubner
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Abstract

We consider a discrete-time, linear state equation with delay which arises as a model for a trader's account value when buying and selling a risky asset in a financial market. The state equation includes a nonnegative feedback gain $\alpha$ and a sequence $v(k)$ which models asset returns which are within known bounds but otherwise arbitrary. We introduce two thresholds, $\alpha_-$ and $\alpha_+$, depending on these bounds, and prove that for $\alpha < \alpha_-$, state positivity is guaranteed for all time and all asset-return sequences; i.e., bankruptcy is ruled out and positive solutions of the state equation are continuable indefinitely. On the other hand, for $\alpha > \alpha_+$, we show that there is always a sequence of asset returns for which the state fails to be positive for all time; i.e., along this sequence, bankruptcy is certain and the solution of the state equation ceases to be meaningful after some finite time. Finally, this paper also includes a conjecture which says that for the "gap" interval $\alpha_- \leq \alpha \leq \alpha_+,$ state positivity is also guaranteed for all time. Support for the conjecture, both theoretical and computational, is provided.

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Chung-Han Hsieh, B. Ross Barmish, John A. Gubner. 2019-01-08. On Positive Solutions of a Delay Equation Arising When Trading in Financial Markets. https://doi.org/10.1109/tac.2019.2945885

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