Asset liquidation under drift uncertainty and regime-switching volatility

Juozas Vaicenavicius

doi:10.1007/s00245-018-9518-5

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arXiv · 1701.08579

Asset liquidation under drift uncertainty and regime-switching volatility

Juozas Vaicenavicius

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Abstract

Optimal liquidation of an asset with unknown constant drift and stochastic regime-switching volatility is studied. The uncertainty about the drift is represented by an arbitrary probability distribution; the stochastic volatility is modelled by $m$-state Markov chain. Using filtering theory, an equivalent reformulation of the original problem as a four-dimensional optimal stopping problem is found and then analysed by constructing approximating sequences of three-dimensional optimal stopping problems. An optimal liquidation strategy and various structural properties of the problem are determined. Analysis of the two-point prior case is presented in detail, building on which, an outline of the extension to the general prior case is given.

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Juozas Vaicenavicius. 2017-01-30. Asset liquidation under drift uncertainty and regime-switching volatility. https://doi.org/10.1007/s00245-018-9518-5

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