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https://investresolve.com/blog/novel-price-estimator-guaranteed-to-produce-non-negative-prices/

Novel Price Estimator Guaranteed to Produce Non

2020-06-25 18:11:27, , ReSolve Asset Management

Content Categorization
/Finance/Investing

Word Count:
1089

Words/Sentence:
24

Reading Time:
7.26 min

Reading Quality:
Intermediate

Readability:
11th or 12th

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However, a position in a risk asset places a certain amount of capital at risk even if the asset's price is negative (for example, shorting a stock still puts capital at risk, or holding a position in CL0K even at a negative price still puts capital at risk).

Also, negative prices can affect the allocation of capital if we are using weights to calculate nominal positions.

The result of this exploration is a new (and potentially novel) price estimator that is guaranteed to never result in a negative price.

In the chart below, the actual closing price is depicted in blue; an EWMA with span of 4 is depicted in orange (notice it goes negative), and the proposed price estimator is depicted in green.

Figure 1.

The new price estimator is:

When applied to the Close prices for the CL 2020K Crude Oil contract, the new price estimator produces a "realistic" price of Crude Oil even during the day when the actual price turned negative.

Specifically, let's say that a security has an expected daily change in price of $1; if we want to commit an amount of capital to such security in an amount that would result in 20% annual risk, then the daily risk target is .

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