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Optimal Selling Strategies under Regime-Switching Market Environment with Finite Expiry

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  • Jie Xing
  • Taoshun He
  • Xiaohua Ding

Abstract

This paper addresses an optimal stock liquidation problem over a finite-time horizon; to that end, we model it as an optimal stopping problem in a regime-switching market. The optimal stopping time is written as a solution to a system of Volterra type integral equations. Moreover, it reveals that when the risk-free interest rate is always lower than the return rate of the stock, it is never optimal to sell the stock early; otherwise, one should sell the stock in bear market if the stock price reaches a critical value and hold the stock in bull market until the maturity date. Finally, we present a trinomial tree method for numerical implementation. The numerical results are consistent with the theoretical findings.

Suggested Citation

  • Jie Xing & Taoshun He & Xiaohua Ding, 2021. "Optimal Selling Strategies under Regime-Switching Market Environment with Finite Expiry," Discrete Dynamics in Nature and Society, Hindawi, vol. 2021, pages 1-16, September.
    • Handle: RePEc:hin:jnddns:5920285
    DOI: 10.1155/2021/5920285
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