Investing and Stopping

Moritz Duembgen and L. C. G. Rogers

Papers from arXiv.org

Abstract: In this paper we solve the hedge fund manager's optimization problem in a model that allows for investors to enter and leave the fund over time depending on its performance. The manager's payoff at the end of the year will then depend not just on the terminal value of the fund level, but also on the lowest and the highest value reached over that time. We establish equivalence to an optimal stopping problem for Brownian motion; by approximating this problem with the corresponding optimal stopping problem for a random walk we are led to a simple and efficient numerical scheme to find the solution, which we then illustrate with some examples.

Date: 2014-03
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1403.0202

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