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Probability and Computational Finance Seminar
Tim Leung
Columbia University
Title: Optimal Mean Reversion Trading with Transaction Costs

Abstract: We study the optimal timing of trades under mean-reverting price dynamics subject to fixed transaction costs. We first consider an optimal double stopping approach to determine the optimal times to enter and subsequently exit the market when prices are driven by an Ornstein-Uhlenbeck (OU), exponential OU, or CIR process. In addition, we analyze a related optimal switching problem with 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, leading to a disconnected continuation (waiting) region for entry. Numerical results are provided to illustrate the dependence of timing strategies on model parameters and transaction costs.

Date: Monday, April 20, 2015
Time: 4:30 pm
Location: Wean Hall 6423
Submitted by:  Scott Robertson