Optimal Timing to Trade Along a Randomized Brownian Bridge

Int. J. Financial Stud. 2018, 6(3), 75; DOI: 10.3390/ijfs6030075

25 Pages Posted: 5 Jan 2018 Last revised: 19 Feb 2019

See all articles by Tim Leung

Tim Leung

University of Washington - Department of Applied Math

Jiao Li

Columbia University

Xin Li

Columbia University

Date Written: July 27, 2018

Abstract

This paper studies an optimal trading problem that incorporates the trader’s market view on the terminal asset price distribution and uninformative noise embedded in the asset price dynamics. We model the underlying asset price evolution by an exponential randomized Brownian bridge (rBb) and consider various prior distributions for the random endpoint. We solve for the optimal strategies to sell a stock, call, or put, and analyze the associated delayed liquidation premia. we solve for the optimal trading strategies numerically and compare them across different prior beliefs. Among our results, we find that disconnected continuation/exercise regions arise when the trader prescribe a two-point discrete distribution and double exponential distribution.

Suggested Citation

Leung, Tim and Li, Jiao and Li, Xin, Optimal Timing to Trade Along a Randomized Brownian Bridge (July 27, 2018). Int. J. Financial Stud. 2018, 6(3), 75; DOI: 10.3390/ijfs6030075, Available at SSRN: https://ssrn.com/abstract=3095050 or http://dx.doi.org/10.2139/ssrn.3095050

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/

Jiao Li

Columbia University ( email )

292C S.W. Mudd Building
500 West 120th Street
New York, NY NY 10027
United States

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/

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
73
Abstract Views
650
rank
393,842
PlumX Metrics