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Momentum liquidation under partial information

Part of: Mathematical finance Stochastic processes

Published online by Cambridge University Press:  21 June 2016

Erik Ekström  and
Martin Vannestål
Erik Ekström*
Affiliation:
Uppsala University
Martin Vannestål*
Affiliation:
Uppsala University
*
* Postal address: Uppsala University, Box 480, 75106 Uppsala, Sweden.
* Postal address: Uppsala University, Box 480, 75106 Uppsala, Sweden.
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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.

Keywords

Momentum tradingstock sellingoptimal stoppingquickest detection problem for Brownian motion

MSC classification

Primary: 91G10: Portfolio theory
Secondary: 60G40: Stopping times; optimal stopping problems; gambling theory
Type
Research Papers
Information
Journal of Applied Probability , Volume 53 , Issue 2 , June 2016 , pp. 341 - 359
Copyright
Copyright © Applied Probability Trust 2016 

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