An Optimal Trading Rule Under a Switchable Mean-Reversion Model

Duy Nguyen (), Jingzhi Tie () and Qing Zhang ()
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Duy Nguyen: University of Georgia
Jingzhi Tie: University of Georgia
Qing Zhang: University of Georgia

Journal of Optimization Theory and Applications, 2014, vol. 161, issue 1, No 8, 145-163

Abstract: Abstract This work provides an optimal trading rule that allows buying and selling an asset sequentially over time. The asset price follows a switchable mean-reversion model with a Markovian jump. Such a model can be applied to assets with a “staircase” price behavior and yet is simple enough to allow an analytic solution. The objective is to determine a sequence of trading times to maximize an overall return. The corresponding value functions are characterized by a set of quasi-variational inequalities. A closed-form solution is obtained under suitable conditions. The sequence of trading times can be given in terms of a set of threshold levels. Finally, numerical examples are given to demonstrate the results.

Keywords: Mean-reverting process; Optimal stopping; Quasi-variational inequalities (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (3)

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DOI: 10.1007/s10957-012-0260-x

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