Optimal Redeeming Strategy of Stock Loans Under Drift Uncertainty

Zuo Quan Xu () and Fahuai Yi ()
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Zuo Quan Xu: Department of Applied Mathematics, Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong Kong;
Fahuai Yi: School of Mathematics and Statistics, Guangdong University of Foreign Studies, Guangzhou, 510006 Guangdong, China

Mathematics of Operations Research, 2020, vol. 45, issue 1, 384–401

Abstract: In practice, one must recognize the inevitable incompleteness of information while making decisions. In this paper, we consider the optimal redeeming problem of stock loans under a state of incomplete information presented by the uncertainty in the (bull or bear) trends of the underlying stock. This is called drift uncertainty. Owing to the unavoidable need for the estimation of trends while making decisions, the related Hamilton–Jacobi–Bellman equation turns out to be of a degenerate parabolic type. Hence, it is very hard to obtain its regularity using the standard approach, making the problem different from the existing optimal redeeming problems without drift uncertainty. We present a thorough and delicate probabilistic and functional analysis to obtain the regularity of the value function and the optimal redeeming strategies. The optimal redeeming strategies of stock loans appear significantly different in the bull and bear trends.

Keywords: stock loan; drift uncertainty; optimal stopping; bull and bear trends; degenerate parabolic variational inequality (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (1)

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