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The right time to sell a stock whose price is driven by Markovian noise

Robert C. Dalang·M. -O. Hongler
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Abstract

We consider the problem of finding the optimal time to sell a stock, subject to a fixed sales cost and an exponential discounting rate ρ. We assume that the price of the stock fluctuates according to the equation dY_t=Y_t(μdt+σξ(t) dt), where (ξ(t)) is an alternating Markov renewal process with values in {\pm1}, with an exponential renewal time. We determine the critical value of ρunder which the value function is finite. We examine the validity of the ``principle of smooth fit'' and use this to give a complete and essentially explicit solution to the problem, which exhibits a surprisingly rich structure. The corresponding result when the stock price evolves according to the Black and Scholes model is obtained as a limit case.

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Robert C. Dalang, M. -O. Hongler. 2005-03-25. The right time to sell a stock whose price is driven by Markovian noise. https://doi.org/10.1214/105051604000000747

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