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
Date Written: April 18, 2015
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: Suggested Citation