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

Stochastic Models, vol 31, issue 4, 2015

25 Pages Posted: 10 Sep 2014 Last revised: 31 Dec 2017

See all articles by Tim Leung

Tim Leung

University of Washington - Department of Applied Math

Xin Li

Columbia University

Zheng Wang

Columbia University

Date Written: April 18, 2015

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.

Keywords: optimal double stopping, optimal switching, exponential OU process, transaction costs

JEL Classification: C41, G11, G12

Suggested Citation

Leung, Tim and Li, Xin and Wang, Zheng, Optimal Multiple Trading Times Under the Exponential OU Model with Transaction Costs (April 18, 2015). Stochastic Models, vol 31, issue 4, 2015, Available at SSRN: https://ssrn.com/abstract=2493492 or http://dx.doi.org/10.2139/ssrn.2493492

Tim Leung (Contact Author)

University of Washington - Department of Applied Math ( email )

Lewis Hall 217
Department of Applied Math
Seattle, WA 98195
United States

HOME PAGE: http://faculty.washington.edu/timleung/

Xin Li

Columbia University ( email )

345 S.W. Mudd Building
500 West 120th Street
New York, NY 10027
United States

HOME PAGE: http://www.columbia.edu/~xl2206/

Zheng Wang

Columbia University ( email )

345 S.W. Mudd Building
500 West 120th Street
New York, NY 10027
United States

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