Optimal trading with a trailing stop
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Publication:2020306
DOI10.1007/S00245-019-09559-0zbMATH Open1471.91545arXiv1701.03960OpenAlexW2949744683WikidataQ128336979 ScholiaQ128336979MaRDI QIDQ2020306
Author name not available (Why is that?)
Publication date: 23 April 2021
Published in: (Search for Journal in Brave)
Abstract: Trailing stop is a popular stop-loss trading strategy by which the investor will sell the asset once its price experiences a pre-specified percentage drawdown. In this paper, we study the problem of timing buy and then sell an asset subject to a trailing stop. Under a general linear diffusion framework, we study an optimal double stopping problem with a random path-dependent maturity. Specifically, we first derive the optimal liquidation strategy prior to a given trailing stop, and prove the optimality of using a sell limit order in conjunction with the trailing stop. Our analytic results for the liquidation problem is then used to solve for the optimal strategy to acquire the asset and simultaneously initiate the trailing stop. The method of solution also lends itself to an efficient numerical method for computing the the optimal acquisition and liquidation regions. For illustration, we implement an example and conduct a sensitivity analysis under the exponential Ornstein-Uhlenbeck model.
Full work available at URL: https://arxiv.org/abs/1701.03960
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