Cautious Stochastic Choice, Optimal Stopping and Randomization

9. November 2017
Research Seminars
Rudower Chaussee 25, Room 1.115, 5 p.m.
Vicky Henderson (University of Warwick)

This work considers an optimal liquidation problem in the context of a Cautious Stochastic Choice (CSC) model.
In the classical case the investor solves an optimal stopping problem which involves maximizing the expected value of a function of stochastic process
representing the price of an asset. The optimal strategy is always a threshold strategy — to liquidate the first time the price process leaves an interval.
In the CSC model context, the investor has a family of utility functions and she is concerned only about the worst case certainty equivalent.
We show that the optimal strategy may be of non-threshold form and may involve randomization.
In this way we show that Cautious Stochastic Choice provides a potential explanation of the use of non-threshold strategies in experimental and empirical evidence.


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