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June 2013 Optimal closing of a momentum trade
Erik Ekström, Carl Lindberg
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J. Appl. Probab. 50(2): 374-387 (June 2013). DOI: 10.1239/jap/1371648947


There is an extensive academic literature that documents that stocks which have performed well in the past often continue to perform well over some holding period - so-called momentum. We study the optimal timing for an asset sale for an agent with a long position in a momentum trade. The asset price is modelled as a geometric Brownian motion with a drift that initially exceeds the discount rate, but with the opposite relation after an unobservable and exponentially distributed time. The problem of optimal selling of the asset is then formulated as an optimal stopping problem under incomplete information. Based on the observations of the asset, the agent wants to detect the unobservable change point as accurately as possible. Using filtering techniques and stochastic analysis, we reduce the problem to a one-dimensional optimal stopping problem, which we solve explicitly. We also show that the optimal boundary at which the investor should liquidate the trade depends monotonically on the model parameters.


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Erik Ekström. Carl Lindberg. "Optimal closing of a momentum trade." J. Appl. Probab. 50 (2) 374 - 387, June 2013.


Published: June 2013
First available in Project Euclid: 19 June 2013

zbMATH: 1266.91095
MathSciNet: MR3102486
Digital Object Identifier: 10.1239/jap/1371648947

Primary: 91G10
Secondary: 60G40

Rights: Copyright © 2013 Applied Probability Trust


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Vol.50 • No. 2 • June 2013
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