Tim Leung, Columbia University

Optimal Mean Reversion Trading with Transaction Costs
Dec 4, 2014, 12:30 pm1:15 pm
101 - Sherrerd Hall
Event Description

In this talk, we discuss 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 Ornstein-Uhlenbeck, exponential OU, or CIR 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 can be disconnected. Numerical results are provided to illustrate the dependence of timing strategies on model parameters and transaction costs.

Event Category
Financial Mathematics Seminar