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Related Experiment Video

Updated: Aug 9, 2025

An R-Based Landscape Validation of a Competing Risk Model
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A Rational Risk Policy? Why Path Dependence Matters.

Hans Geboers1, Benoît Depaire1

  • 1Quantitative Methods, Research Group Business Informatics, Hasselt University, 3500 Hasselt, Belgium.

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|February 25, 2023
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Summary
This summary is machine-generated.

The Kelly criterion maximizes growth but can cause large losses. This study introduces a framework to assess path-dependent risks, showing that strategies maximizing growth may be unsustainable with certain return distributions.

Keywords:
Kelly criterionoptimal leveragepath dependencerisk management

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Area of Science:

  • Quantitative Finance
  • Investment Risk Management

Background:

  • The Kelly criterion is a strategy for maximizing long-term investment growth.
  • Maximizing growth alone can lead to significant portfolio drawdowns and psychological distress.
  • Path-dependent risk measures are crucial for evaluating severe portfolio retracements.

Purpose of the Study:

  • To develop a flexible framework for assessing path-dependent risk in trading and investment operations.
  • To analyze the impact of different return distributions on strategy sustainability.
  • To highlight the limitations of solely focusing on growth maximization.

Main Methods:

  • Utilizing Monte Carlo simulations to model cumulative return paths.
  • Analyzing medium-term behavior of various return distributions.
  • Conducting experimental analysis to demonstrate risk implications.

Main Results:

  • Strategies focused solely on maximizing growth can lead to unsustainable drawdowns.
  • Path-dependent risks are critical, especially with heavier-tailed return distributions.
  • The 'optimal' Kelly criterion strategy may not be optimal in practice under certain conditions.

Conclusions:

  • A balanced approach considering both growth and drawdown risk is essential for sustainable investment strategies.
  • The proposed framework aids in evaluating the true risk profile of investment operations.
  • Risk management must account for the specific characteristics of return distributions.