Journal of Applied Probability

Momentum liquidation under partial information

Erik Ekström and Martin Vannestål

Full-text: Access denied (no subscription detected)

We're sorry, but we are unable to provide you with the full text of this article because we are not able to identify you as a subscriber. If you have a personal subscription to this journal, then please login. If you are already logged in, then you may need to update your profile to register your subscription. Read more about accessing full-text

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.

Article information

Source
J. Appl. Probab., Volume 53, Number 2 (2016), 341-359.

Dates
First available in Project Euclid: 17 June 2016

Permanent link to this document
https://projecteuclid.org/euclid.jap/1466172858

Mathematical Reviews number (MathSciNet)
MR3514282

Zentralblatt MATH identifier
06614113

Subjects
Primary: 91G10: Portfolio theory
Secondary: 60G40: Stopping times; optimal stopping problems; gambling theory [See also 62L15, 91A60]

Keywords
Momentum trading stock selling optimal stopping quickest detection problem for Brownian motion

Citation

Ekström, Erik; Vannestål, Martin. Momentum liquidation under partial information. J. Appl. Probab. 53 (2016), no. 2, 341--359. https://projecteuclid.org/euclid.jap/1466172858


Export citation

References

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