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Article: Two rationales behind the 'buy-and-hold or sell-at-once' strategy
Title | Two rationales behind the 'buy-and-hold or sell-at-once' strategy |
---|---|
Authors | |
Keywords | Binomial Tree Model Martingales Optimal Stopping P-Random Walk |
Issue Date | 2009 |
Publisher | Applied Probability Trust. The Journal's web site is located at http://www.shef.ac.uk/uni/companies/apt/ap.html |
Citation | Journal Of Applied Probability, 2009, v. 46 n. 3, p. 651-668 How to Cite? |
Abstract | The trading strategy of 'buy-and-hold for superior stock and sell-at-once for inferior stock', as suggested by conventional wisdom, has long been prevalent in Wall Street. In this paper, two rationales are provided to support this trading strategy from a purely mathematical standpoint. Adopting the standard binomial tree model (or CRR model for short, as first introduced in Cox, Ross and Rubinstein (1979)) to model the stock price dynamics, we look for the optimal stock selling rule(s) so as to maximize (i) the chance that an investor can sell a stock precisely at its ultimate highest price over a fixed investment horizon [0, T ]; and (ii) the expected ratio of the selling price of a stock to its ultimate highest price over [0, T ]. We show that both problems have exactly the same optimal solution which can literally be interpreted as 'buy-and-hold or sell-at-once' depending on the value of p (the going-up probability of the stock price at each step): whenp > 1/2 , selling the stock at the last time step N is the optimal selling strategy; when p = 1/2 , a selling time is optimal if the stock is sold either at the last time step or at the time step when the stock price reaches its running maximum price; and when p < 1/2 , time 0, i.e. selling the stock at once, is the unique optimal selling time. © 2009 Applied Probability Trust. |
Persistent Identifier | http://hdl.handle.net/10722/156244 |
ISSN | 2023 Impact Factor: 0.7 2023 SCImago Journal Rankings: 0.551 |
ISI Accession Number ID | |
References |
DC Field | Value | Language |
---|---|---|
dc.contributor.author | Yam, SCP | en_US |
dc.contributor.author | Yung, SP | en_US |
dc.contributor.author | Zhou, W | en_US |
dc.date.accessioned | 2012-08-08T08:41:00Z | - |
dc.date.available | 2012-08-08T08:41:00Z | - |
dc.date.issued | 2009 | en_US |
dc.identifier.citation | Journal Of Applied Probability, 2009, v. 46 n. 3, p. 651-668 | en_US |
dc.identifier.issn | 0021-9002 | en_US |
dc.identifier.uri | http://hdl.handle.net/10722/156244 | - |
dc.description.abstract | The trading strategy of 'buy-and-hold for superior stock and sell-at-once for inferior stock', as suggested by conventional wisdom, has long been prevalent in Wall Street. In this paper, two rationales are provided to support this trading strategy from a purely mathematical standpoint. Adopting the standard binomial tree model (or CRR model for short, as first introduced in Cox, Ross and Rubinstein (1979)) to model the stock price dynamics, we look for the optimal stock selling rule(s) so as to maximize (i) the chance that an investor can sell a stock precisely at its ultimate highest price over a fixed investment horizon [0, T ]; and (ii) the expected ratio of the selling price of a stock to its ultimate highest price over [0, T ]. We show that both problems have exactly the same optimal solution which can literally be interpreted as 'buy-and-hold or sell-at-once' depending on the value of p (the going-up probability of the stock price at each step): whenp > 1/2 , selling the stock at the last time step N is the optimal selling strategy; when p = 1/2 , a selling time is optimal if the stock is sold either at the last time step or at the time step when the stock price reaches its running maximum price; and when p < 1/2 , time 0, i.e. selling the stock at once, is the unique optimal selling time. © 2009 Applied Probability Trust. | en_US |
dc.language | eng | en_US |
dc.publisher | Applied Probability Trust. The Journal's web site is located at http://www.shef.ac.uk/uni/companies/apt/ap.html | en_US |
dc.relation.ispartof | Journal of Applied Probability | en_US |
dc.subject | Binomial Tree Model | en_US |
dc.subject | Martingales | en_US |
dc.subject | Optimal Stopping | en_US |
dc.subject | P-Random Walk | en_US |
dc.title | Two rationales behind the 'buy-and-hold or sell-at-once' strategy | en_US |
dc.type | Article | en_US |
dc.identifier.email | Yung, SP:spyung@hkucc.hku.hk | en_US |
dc.identifier.authority | Yung, SP=rp00838 | en_US |
dc.description.nature | link_to_subscribed_fulltext | en_US |
dc.identifier.doi | 10.1239/jap/1253279844 | en_US |
dc.identifier.scopus | eid_2-s2.0-70350077318 | en_US |
dc.relation.references | http://www.scopus.com/mlt/select.url?eid=2-s2.0-70350077318&selection=ref&src=s&origin=recordpage | en_US |
dc.identifier.volume | 46 | en_US |
dc.identifier.issue | 3 | en_US |
dc.identifier.spage | 651 | en_US |
dc.identifier.epage | 668 | en_US |
dc.identifier.isi | WOS:000270604900003 | - |
dc.publisher.place | United Kingdom | en_US |
dc.identifier.scopusauthorid | Yam, SCP=35112610600 | en_US |
dc.identifier.scopusauthorid | Yung, SP=7006540951 | en_US |
dc.identifier.scopusauthorid | Zhou, W=35312980700 | en_US |
dc.identifier.issnl | 0021-9002 | - |