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Annals of Finance

, Volume 15, Issue 1, pp 1–28 | Cite as

Optimal risk-averse timing of an asset sale: trending versus mean-reverting price dynamics

  • Tim LeungEmail author
  • Zheng Wang
Research Article
  • 45 Downloads

Abstract

This paper studies the optimal risk-averse timing to sell a risky asset. The investor’s risk preference is described by the exponential, power, or log utility. Two stochastic models are considered for the asset price— the geometric Brownian motion and exponential Ornstein–Uhlenbeck models—to account for, respectively, the trending and mean-reverting price dynamics. In all cases, we derive the optimal thresholds and certainty equivalents to sell the asset, and compare them across models and utilities, with emphasis on their dependence on asset price, risk aversion, and quantity. We find that the timing option may render the investor’s value function and certainty equivalent non-concave in price. Numerical results are provided to illustrate the investor’s strategies and the premium associated with optimally timing to sell.

Keywords

Asset sale Optimal stopping Certainty equivalent Variational inequality 

JEL Classification

C41 G11 G12 

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Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Applied Mathematics DepartmentUniversity of WashingtonSeattleUSA
  2. 2.IEOR DepartmentColumbia UniversityNew YorkUSA

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