Title :
An optimal stock liquidation rule
Author_Institution :
Dept. of Math., Georgia Univ., Athens, GA, USA
Abstract :
Trading in stock markets consists of three major steps: select a stock, purchase a number of shares, and eventually sell them to make a profit. The timing to buy and sell is extremely crucial. A selling rule can be specified by two pre-selected levels: a target price and a stop-loss limit. The paper is concerned with an optimal selling rule based on the model characterized by a number of geometric Brownian motions coupled by a finite-state Markov chain. Such policy can be obtained by solving a set of two-point boundary value differential equations. Moreover, the corresponding expected target period and probability of making money and that of losing money are derived. A numerical example is considered to demonstrate the effectiveness of our method
Keywords :
Brownian motion; Markov processes; boundary-value problems; differential equations; diffusion; optimisation; probability; stock markets; buying rule; finite-state Markov chain; geometric Brownian motions; optimal stock liquidation rule; price movement; probability; selling rule; stock markets; stop-loss limit; target price; trading; two-point boundary value differential equations; Character generation; Differential equations; Finance; Mathematical model; Performance analysis; Pricing; Solid modeling; Stochastic processes; Stock markets; Timing;
Conference_Titel :
Decision and Control, 2001. Proceedings of the 40th IEEE Conference on
Conference_Location :
Orlando, FL
Print_ISBN :
0-7803-7061-9
DOI :
10.1109/.2001.980920
