Kelly trading when asset prices have jumps
Bermin, Hans-Peter LU
and Holm, Magnus
(2026)
In Decisions in Economics and Finance
- Abstract
- If asset prices have no jumps it is known that the growth optimal Kelly strategy lies on the local efficient frontier, that is has maximal instantaneous Sharpe ratio. In this paper we show that, when asset prices have jumps, this property ceases to hold. However, the discrepancy is small for jumps with magnitude less than 25%. Our results further indicate that a Kelly trader fears market crashes but favors stock picking more than a maximal Sharpe trader. We also explain why Merton’s approach to jump modeling is not well suited to study the risk of bankruptcy associated with leverage.
Please use this url to cite or link to this publication:
https://lup.lub.lu.se/record/f45552ed-1895-4bc9-b49a-3983e2e3488c
- author
- Bermin, Hans-Peter
LU
and Holm, Magnus
- organization
- publishing date
- 2026-01-12
- type
- Contribution to journal
- publication status
- epub
- subject
- keywords
- Kelly criterion, Maximal Sharpe, Jumps, Portfolio theory
- in
- Decisions in Economics and Finance
- publisher
- Springer-Verlag Italia s.r.l.
- external identifiers
-
- scopus:105041727409
- ISSN
- 1593-8883
- DOI
- 10.1007/s10203-025-00561-6
- project
- Knut Wicksell Centre for Financial Studies
- language
- English
- LU publication?
- yes
- id
- f45552ed-1895-4bc9-b49a-3983e2e3488c
- date added to LUP
- 2026-04-21 13:36:27
- date last changed
- 2026-08-22 04:01:18
@article{f45552ed-1895-4bc9-b49a-3983e2e3488c,
abstract = {{If asset prices have no jumps it is known that the growth optimal Kelly strategy lies on the local efficient frontier, that is has maximal instantaneous Sharpe ratio. In this paper we show that, when asset prices have jumps, this property ceases to hold. However, the discrepancy is small for jumps with magnitude less than 25%. Our results further indicate that a Kelly trader fears market crashes but favors stock picking more than a maximal Sharpe trader. We also explain why Merton’s approach to jump modeling is not well suited to study the risk of bankruptcy associated with leverage.}},
author = {{Bermin, Hans-Peter and Holm, Magnus}},
issn = {{1593-8883}},
keywords = {{Kelly criterion; Maximal Sharpe; Jumps; Portfolio theory}},
language = {{eng}},
month = {{01}},
publisher = {{Springer-Verlag Italia s.r.l.}},
series = {{Decisions in Economics and Finance}},
title = {{Kelly trading when asset prices have jumps}},
url = {{http://dx.doi.org/10.1007/s10203-025-00561-6}},
doi = {{10.1007/s10203-025-00561-6}},
year = {{2026}},
}