Trend Following Trading Under a Regime Switching Model

Authors

M. Dai, National University of Singapore
Q Zhang, University of Georgia
Qiji Jim Zhu, Western Michigan UniversityFollow

Document Type

Article

Publication Date

10-21-2010

Abstract

This paper is concerned with the optimality of a trend following trading rule. The idea is to catch a bull market at its early stage, ride the trend, and liquidate the position at the first evidence of the subsequent bear market. We characterize the bull and bear phases of the markets mathematically using the conditional probabilities of the bull market given the up to date stock prices. The optimal buying and selling times are given in terms of a sequence of stopping times determined by two threshold curves. Numerical experiments are conducted to validate the theoretical results and demonstrate how they perform in a marketplace.

Comments

https://doi.org/10.1137/090770552

WMU ScholarWorks Citation

Dai, M.; Zhang, Q; and Zhu, Qiji Jim, "Trend Following Trading Under a Regime Switching Model" (2010). Math Faculty Publications. 38.
https://scholarworks.wmich.edu/math_pubs/38