Optimal Trading Strategy When Return Process is AR(1)

Kin Lam and Li Wei - Hong Kong Baptist University

If an investor invests in an single asset in a financial market, what trading strategy should he/she adopt in order to maximize his/her investment return, assuming that the movement of the return series of the asset follows an AR(l) model and the model parameters are known to the investor? By the use of stochastic dynamic programming techniques, the optimal trading strategy over a finite time horizon can be derived. When the investment horizon is infinite, the optimal strategy together with its average reward can also be obtained.

Scheduled for Session 1.5 Financial Models - I