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Partial liquidation under reference-dependent preferences
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Henderson, Vicky and Muscat, Jonathan (2019) Partial liquidation under reference-dependent preferences. Finance and Stochastics, 24 . pp. 335-357. doi:10.1007/s00780-020-00421-8 ISSN 0949-2984.
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Official URL: https://doi.org/10.1007/s00780-020-00421-8
Abstract
We propose a multiple optimal stopping model where an investor can sell a divisible asset position at times of her choosing. Investors have S-shaped reference-dependent preferences, whereby utility is defined over gains and losses relative to a reference level and is concave over gains and convex over losses. For a price process following a time-homogeneous diffusion, we employ the constructive potential-theoretic solution method developed by Dayanik and Karatzas (Stoch. Process. Appl. 107:173–212, 2003). As an example, we revisit the single optimal stopping model of Kyle et al. (J. Econ. Theory 129:273–288, 2006) to allow partial liquidation. In contrast to the extant literature, we find that the investor may partially liquidate the asset at distinct price thresholds above the reference level. Under other parameter combinations, the investor sells the asset in a block, either at or above the reference level.
Item Type: | Journal Article | ||||||
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Subjects: | H Social Sciences > HG Finance Q Science > QA Mathematics |
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Divisions: | Faculty of Science, Engineering and Medicine > Science > Statistics | ||||||
Library of Congress Subject Headings (LCSH): | Linear programming, Decision making -- Mathematical models, Uncertainty -- Mathematical models, Investments -- Psychological aspects, Finance -- Psychological aspects | ||||||
Journal or Publication Title: | Finance and Stochastics | ||||||
Publisher: | Springer | ||||||
ISSN: | 0949-2984 | ||||||
Official Date: | 16 March 2019 | ||||||
Dates: |
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Volume: | 24 | ||||||
Page Range: | pp. 335-357 | ||||||
DOI: | 10.1007/s00780-020-00421-8 | ||||||
Status: | Peer Reviewed | ||||||
Publication Status: | Published | ||||||
Access rights to Published version: | Open Access (Creative Commons) | ||||||
Date of first compliant deposit: | 28 November 2019 | ||||||
Date of first compliant Open Access: | 27 April 2020 | ||||||
RIOXX Funder/Project Grant: |
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