The Expected Utility of the Doubling Strategy

  • Author(s): EDWARD OMBERG
  • Published: Apr 30, 2012
  • Pages: 515-524
  • DOI: 10.1111/j.1540-6261.1989.tb05071.x

ABSTRACT

It has been noted that a certain continuous‐time trading strategy, termed the “doubling strategy”, generates a positive net return on borrowed funds, with probability one and within a finite period of time. Since the doubling strategy seems to represent a “free lunch” or arbitrage opportunity, a variety of constraints to render it infeasible have been proposed. In this paper, we show that the doubling strategy generates infinite disutility for a large class of utility functions, and we can think of no utility function for a risk‐averse agent which is a counterexample.

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