Please use this identifier to cite or link to this item: http://hdl.handle.net/10397/32149
Title: Two rationales behind the 'buy-and-hold or sell-at-once' strategy
Authors: Yam, SCP
Yung, SP
Zhou, W
Keywords: Binomial tree model
Martingales
Optimal stopping
P-random walk
Issue Date: 2009
Source: Journal of applied probability, 2009, v. 46, no. 3, p. 651-668 How to cite?
Journal: Journal of Applied Probability 
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.
URI: http://hdl.handle.net/10397/32149
ISSN: 0021-9002
DOI: 10.1239/jap/1253279844
Appears in Collections:Journal/Magazine Article

Access
View full-text via PolyU eLinks SFX Query
Show full item record

SCOPUSTM   
Citations

10
Last Week
0
Last month
0
Citations as of May 26, 2017

Page view(s)

30
Last Week
0
Last month
Checked on May 28, 2017

Google ScholarTM

Check

Altmetric



Items in DSpace are protected by copyright, with all rights reserved, unless otherwise indicated.