TY - JOUR
T1 - Leverage management in a bull-bear switching market
AU - Dai, Min
AU - Wang, Hefei
AU - Yang, Zhou
N1 - Funding Information:
The authors wish to thank two anonymous referees, and audience members at the Society of Financial Econometrics (SOFIE) 3rd Annual Conference and the International Symposium on Financial Engineering and Risk Management for helpful comments. This work is supported by Singapore MOE AcRF Grant (no. R-146-000-138-112 ) and NUS RMI Grant (no. R-146-000-124-720/646 ), NNSF of China (nos. 10901060 and 10971073 ), Guangdong Innovative Universities in Outstanding Young Talent Cultivation Project (no. LYM10062 ), and NNSF of Zhejiang Province (no. Y6110775 ).
PY - 2012/10
Y1 - 2012/10
N2 - Should an investor unwind his portfolio in the face of changing economic conditions? We study an investor's optimal trading strategy with finite horizon and transaction costs in an economy that switches stochastically between two market conditions. We fully characterize the investor's time dependent investment strategy in a "bull" market and a "bear" market. We show that when the market switches from the "bull" market to the "bear" market, complete deleveraging, reducing the degree of leverage, or keeping leverage unchanged may all be optimal strategies, subject to underlying market conditions. We further show that the investor may optimally keep leverage unchanged in the "bear" market, particularly so for illiquid asset. On the other hand, a lower borrowing cost in the "bear" market would prevent sell offs.
AB - Should an investor unwind his portfolio in the face of changing economic conditions? We study an investor's optimal trading strategy with finite horizon and transaction costs in an economy that switches stochastically between two market conditions. We fully characterize the investor's time dependent investment strategy in a "bull" market and a "bear" market. We show that when the market switches from the "bull" market to the "bear" market, complete deleveraging, reducing the degree of leverage, or keeping leverage unchanged may all be optimal strategies, subject to underlying market conditions. We further show that the investor may optimally keep leverage unchanged in the "bear" market, particularly so for illiquid asset. On the other hand, a lower borrowing cost in the "bear" market would prevent sell offs.
KW - Bull-bear switching market
KW - Leverage
KW - Portfolio selection
KW - Transaction costs
UR - https://www.scopus.com/pages/publications/84863862288
U2 - 10.1016/j.jedc.2012.04.004
DO - 10.1016/j.jedc.2012.04.004
M3 - Article
AN - SCOPUS:84863862288
SN - 0165-1889
VL - 36
SP - 1585
EP - 1599
JO - Journal of Economic Dynamics and Control
JF - Journal of Economic Dynamics and Control
IS - 10
ER -