HSE Economist Finds Way to Improve Efficiency of Stock Market Trading Strategies
An economist at HSE University has analysed possible trading strategies on the stock market and shown that investors can achieve higher returns if they determine the size of their trades based on the degree of intraday fluctuations in asset prices. When the key interest rate is high, the advantage of this strategy over a conventional one increases 4.7-fold. The study has been published in the journal Enterprise Development and Microfinance.
When trading on the stock market, investors often use the Sharpe ratio, which shows the return generated by securities relative to their level of risk. The higher the ratio, the more efficient the trading strategy. Investors usually measure risk using volatility, that is, the degree to which asset prices fluctuate during the day. Modern methods make it possible to forecast volatility, but until now investors have lacked a clear understanding of how to adjust their market behaviour based on this information. They can change the number of shares they buy or sell or adjust the parameters of a trade, but it has been unclear which approach would generate higher returns.
Calculations by Nikita Lysenok, a researcher at the HSE Faculty of Economic Sciences, have shown that using volatility forecasts to determine trade size can almost double the return per unit of risk, as measured by the Sharpe ratio. The gain comes specifically from reducing the risk of trades. To demonstrate this, the author selected six trading strategies suitable for different market conditions. For each strategy, he tested four ways of using volatility forecasts: not using the forecast at all; fine-tuning trade parameters, such as the prices at which securities are automatically sold or bought; avoiding trades when the level of risk is too high; and directly changing the size of trades.
The models were then trained on data for 17 stocks traded on the Moscow Exchange, which account for around 80% of the market's capitalisation, and their trading returns and efficiency were tested over the previous four years. The baseline strategy without volatility forecasts produced a Sharpe ratio of 1.32, with a return of 19.6%, against which the results of the other approaches were compared.
The study found that using volatility forecasts to fine-tune trades was almost pointless. It increased the Sharpe ratio only slightly, to 1.47. Using forecasts to determine position size, however, produced a much greater benefit. Entering the market with more capital during calm periods and with less during turbulent periods increased the Sharpe ratio—that is, the return per unit of risk—by 1.2 points, while reducing portfolio fluctuations by one-third.
Nikita Lysenok
‘Imagine that you are deciding whether to go hiking today. Fine-tuning the parameters of a trade is like choosing a pair of boots. The right pair will be useful, but if there is a storm, they will not save you. Choosing the size of a trade, on the other hand, is like deciding whether to go at all and, if you do, how far to go. That decision is made earlier and has a much greater financial impact,’ explained Nikita Lysenok.
The effect was strongest when the key interest rate was high. In 2023, when the average rate was 9.9%, the baseline strategy performed reliably, with a Sharpe ratio of 2.99. As the rate increased, the strategy weakened, and in 2025, when the rate reached 21%, the ratio fell to 0.4. Trading almost ceased to justify the risk. In other words, volatility forecasts should be used for major decisions about trade size rather than to adjust every individual trade parameter to current market conditions.
‘The calculations were primarily carried out for large market players because maintaining such a system requires large amounts of data and substantial infrastructure. As a result, it only pays off for a portfolio of 160 million rubles, which fewer than 3% of active investors have. However, the underlying conclusion also applies to smaller amounts and does not require any model: it is much more important to decide how much money you are prepared to commit to each trade than to choose some fine-tuned characteristics,’ said Nikita Lysenok.
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