Optimal redeeming strategy of stock loans under drift uncertainty

DOI10.1287/MOOR.2019.0995zbMATH Open1437.91423arXiv1901.06680OpenAlexW2984156336WikidataQ126794630 ScholiaQ126794630MaRDI QIDQ5108271FDOQ5108271

Authors: Zuo Quan Xu, Fahuai Yi 

Publication date: 30 April 2020

Published in: Mathematics of Operations Research (Search for Journal in Brave)

Abstract: In practice, one must recognize the inevitable incompleteness of information while making decisions. In this paper, we consider the optimal redeeming problem of stock loans under a state of incomplete information presented by the uncertainty in the (bull or bear) trends of the underlying stock. This is called drift uncertainty. Due to the unavoidable need for the estimation of trends while making decisions, the related Hamilton-Jacobi-Bellman (HJB) equation is of a degenerate parabolic type. Hence, it is very hard to obtain its regularity using the standard approach, making the problem different from the existing optimal redeeming problems without drift uncertainty. We present a thorough and delicate probabilistic and functional analysis to obtain the regularity of the value function and the optimal redeeming strategies. The optimal redeeming strategies of stock loans appear significantly different in the bull and bear trends.

Full work available at URL: https://arxiv.org/abs/1901.06680

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zbMATH Keywords

optimal stoppingasset pricingstock loanstochastic model applicationsdrift uncertaintydegenerate parabolic variational inequalitybull and bear trendsdynamic programming: Bayesian

Mathematics Subject Classification ID

Financial markets (91G15) Stopping times; optimal stopping problems; gambling theory (60G40)

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Cited In (5)

• Short selling with margin risk and recall risk
• Stochastic maximum principle for hybrid optimal control problems under partial observation
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• Numerical method for a system of PIDEs arising in American contingent claims under FMLS model with jump diffusion and regime-switching process
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