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Optimal Short-Covering with Regime Switching

In: RECENT ADVANCES IN FINANCIAL ENGINEERING 2014 Proceedings of the TMU Finance Workshop 2014

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  • Tsz-Kin Chung

Abstract

We formulate a short-selling strategy of a stock and seek the optimal timing of short covering in the presence of a random recall and a loan fee rate in an illiquid stock loan market. The aim is to study how the optimal trading strategy of the short-seller is influenced by the relevant features of the stock loan market. We consider a regime-switching stock price model that captures the transition in between the bull and the bear markets. The solution to the optimal stopping problem is obtained in closed-form based on the techniques in Guo and Zhang (2005). We provide the numerical example to illustrate of importance of a regime-dependent stopping rule for the short-seller's problem.

Suggested Citation

  • Tsz-Kin Chung, 2016. "Optimal Short-Covering with Regime Switching," World Scientific Book Chapters, in: Masaaki Kijima & Yukio Muromachi & Takashi Shibata (ed.), RECENT ADVANCES IN FINANCIAL ENGINEERING 2014 Proceedings of the TMU Finance Workshop 2014, chapter 4, pages 75-93, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789814730778_0004
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    Cited by:

    1. Kristoffer Glover & Hardy Hulley, 2022. "Short Selling With Margin Risk And Recall Risk," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 25(02), pages 1-33, March.

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