Optimal Multiple Trading Times Under the Exponential OU Model with Transaction Costs

Tim Leung, Xin Li and Zheng Wang

Papers from arXiv.org

Abstract: This paper studies the timing of trades under mean-reverting price dynamics subject to fixed transaction costs. We solve an optimal double stopping problem to determine the optimal times to enter and subsequently exit the market, when prices are driven by an exponential Ornstein-Uhlenbeck process. In addition, we analyze a related optimal switching problem that involves an infinite sequence of trades, and identify the conditions under which the double stopping and switching problems admit the same optimal entry and/or exit timing strategies. Among our results, we find that the investor generally enters when the price is low, but may find it optimal to wait if the current price is sufficiently close to zero. In other words, the continuation (waiting) region for entry is disconnected. Numerical results are provided to illustrate the dependence of timing strategies on model parameters and transaction costs.

Date: 2015-04
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (22)

Downloads: (external link)
http://arxiv.org/pdf/1504.04682 Latest version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1504.04682

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().