Optimal Timing to Trade along a Randomized Brownian Bridge

Tim Leung, Jiao Li and Xin Li
Additional contact information
Jiao Li: APAM Department, Columbia University, New York, NY 10027, USA
Xin Li: Bank of America Merrill Lynch, One Bryant Park, New York, NY 10036, USA

IJFS, 2018, vol. 6, issue 3, 1-23

Abstract: This paper studies an optimal trading problem that incorporates the trader’s market view on the terminal asset price distribution and uninformative noise embedded in the asset price dynamics. We model the underlying asset price evolution by an exponential randomized Brownian bridge (rBb) and consider various prior distributions for the random endpoint. We solve for the optimal strategies to sell a stock, call, or put, and analyze the associated delayed liquidation premia. We solve for the optimal trading strategies numerically and compare them across different prior beliefs. Among our results, we find that disconnected continuation/exercise regions arise when the trader prescribe a two-point discrete distribution and double exponential distribution.

Keywords: speculative trading; Brownian bridge; optimal stopping; variational inequality (search for similar items in EconPapers)
JEL-codes: F2 F3 F41 F42 G1 G2 G3 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Related works:
Working Paper: Optimal Timing to Trade Along a Randomized Brownian Bridge (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:gam:jijfss:v:6:y:2018:i:3:p:75-:d:166614

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