Optimal Selling of an Asset with Jumps Under Incomplete Information

Bing Lu

Applied Mathematical Finance, 2013, vol. 20, issue 6, 599-610

Abstract: We study the optimal liquidation strategy of an asset with price process satisfying a jump diffusion model with unknown jump intensity. It is assumed that the intensity takes one of two given values, and we have an initial estimate for the probability of both of them. As time goes by, by observing the price fluctuations, we can thus update our beliefs about the probabilities for the intensity distribution. We formulate an optimal stopping problem describing the optimal liquidation problem. It is shown that the optimal strategy is to liquidate the first time the point process falls below (goes above) a certain time-dependent boundary.

Date: 2013
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DOI: 10.1080/1350486X.2013.810462

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