 Some applications of first-passage ideas to financeRémy Chicheportiche () and
Jean-Philippe Bouchaud ()
Post-Print from HAL Abstract: Many problems in finance are related to first passage times. Among all of them, we chose three on which we contributed personally. Our first example relates Kolmogorov-Smirnov like goodness-of-fit tests, modified in such a way that tail events and core events contribute equally to the test (in the standard Kolmogorov-Smirnov, the tails contribute very little to the measure of goodness-of-fit). We show that this problem can be mapped onto that of a random walk inside moving walls. The second example is the optimal time to sell an asset (modelled as a random walk with drift) such that the sell time is as close as possible to the time at which the asset reaches its maximum value. The last example concerns optimal trading in the presence of transaction costs. In this case, the optimal strategy is to wait until the predictor reaches (plus or minus) a threshold value before buying or selling. The value of this threshold is found by mapping the problem onto that of a random walk between two walls. Date: 2014-03-01 Published in Ralf Metzler, Gleb Oshanin, Sidney Redner. First-passage Phenomena and Their Applications, World Scientific Publishing, pp.447-476, 2014, 978-9814590280 There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it. Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01010312 Access Statistics for this paper More papers in Post-Print from HAL |
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