Hostname: page-component-78c5997874-s2hrs Total loading time: 0 Render date: 2024-11-10T10:34:13.313Z Has data issue: false hasContentIssue false
  • English
  • Français

Momentum liquidation under partial information

Part of: Stochastic processes Mathematical finance

Published online by Cambridge University Press:  21 June 2016

Erik Ekström  and
Martin Vannestål
Erik Ekström*
Affiliation:
Uppsala University
Martin Vannestål*
Affiliation:
Uppsala University
*
* Postal address: Uppsala University, Box 480, 75106 Uppsala, Sweden.
* Postal address: Uppsala University, Box 480, 75106 Uppsala, Sweden.
Get access Rights & Permissions [Opens in a new window]

Abstract

Momentum is the notion that an asset that has performed well in the past will continue to do so for some period. We study the optimal liquidation strategy for a momentum trade in a setting where the drift of the asset drops from a high value to a smaller one at some random change-point. This change-point is not directly observable for the trader, but it is partially observable in the sense that it coincides with one of the jump times of some exogenous Poisson process representing external shocks, and these jump times are assumed to be observable. Comparisons with existing results for momentum trading under incomplete information show that the assumption that the disappearance of the momentum effect is triggered by observable external shocks significantly improves the optimal strategy.

Keywords

Momentum tradingstock sellingoptimal stoppingquickest detection problem for Brownian motion

MSC classification

Primary: 91G10: Portfolio theory
Secondary: 60G40: Stopping times; optimal stopping problems; gambling theory
Type
Research Papers
Information
Journal of Applied Probability , Volume 53 , Issue 2 , June 2016 , pp. 341 - 359
Copyright
Copyright © Applied Probability Trust 2016 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

[1]Bayraktar, E. (2011).On the perpetual American put options for level dependent volatility models with jumps.Quant. Finance 11, 335–341.Google Scholar
[2]Borodin, A. N. and Salminen, P. (2002).Handbook of Brownian Motion—Facts and Formulae, 2nd edn.Birkhäuser, Basel.Google Scholar
[3]Chakrabarty, A. and Guo, X. (2012).Optimal stopping times with different information levels and with time uncertainty. In Stochastic Analysis and Applications to Finance (Interdiscip. Math. Sci.13), World Scientific, Hackensack, NJ, pp.19–38.CrossRefGoogle Scholar
[4]Dai, M., Yang, Z. and Zhong, Y. (2012).Optimal stock selling based on the global maximum.SIAM J. Control Optimization 50, 1804–1822.Google Scholar
[5]Dayanik, S., Poor, V. and Sezer, S. O. (2008).Multisource Bayesian sequential change detection.Ann. Appl. Prob. 18, 552–590.Google Scholar
[6]Décamps, J.-P., Mariotti, T. and Villeneuve, S. (2005).Investment timing under incomplete information.Math. Operat. Res. 30, 472–500.CrossRefGoogle Scholar
[7]Ekström, E. and Lindberg, C. (2013).Optimal closing of a momentum trade.J. Appl. Prob. 50, 374–387.Google Scholar
[8]Ekström, E. and Lu, B. (2011).Optimal selling of an asset under incomplete information.Internat. J. Stoch. Anal. 2011, 543590.Google Scholar
[9]Gugerli, U. S. (1986).Optimal stopping of a piecewise-deterministic Markov process.Stochastics 19, 221–236.Google Scholar
[10]Jegadeesh, N. and Titman, S. (1993).Returns to buying winners and selling losers: implications for stock market efficiency.J. Finance 48, 65–91.CrossRefGoogle Scholar
[11]Jegadeesh, N. and Titman, S. (2001).Profitability of momentum strategies: an evaluation of alternative explanations.J. Finance 56, 699–720.Google Scholar
[12]Karatzas, I. and Shreve, S. E. (1991).Brownian Motion and Stochastic Calculus, 2nd edn.Springer, New York.Google Scholar
[13]Klein, M. (2009).Comment on 'Investment timing under incomplete information'.Math. Operat. Res. 34, 249–254.Google Scholar
[14]Liptser, R. S. and Shiryaev, A. N. (1978).Statistics of Random Processes. II.Springer, New York.Google Scholar
[15]Rouwenhorst, K. G. (1998).International momentum strategies.J. Finance 53, 267–284.Google Scholar
[16]Sezer, S. O. (2010).On the Wiener disorder problem.Ann. Appl. Prob. 20, 1537–1566.Google Scholar
[17]Shiryaev, A. and Novikov, A. A. (2009).On a stochastic version of the trading rule 'buy and hold'.Statist. Decisions 26, 289–302.CrossRefGoogle Scholar
[18]Shiryaev, A., Xu, Z. and Zhou, X. Y. (2008).Thou shalt buy and hold.Quant. Finance 8, 765–776.Google Scholar