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Stopping Rules for Selling Bonds

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  • William M. Boyce

Abstract

We model the problem of selling or issuing bonds so as to maximize the selling price (minimize the interest rate) as an optimal stopping problem for a random process or time series. Available information on, or predictions of, the price at a future time are included as a constraint on the process. Both continuous-time and discrete models are analyzed. For the case in which the predicted future price is normal or Gaussian we obtain good estimates of the optimal stopping strategy and expected gain. A significant conclusion is that the nature of the optimal strategy can be very sensitive to the relative variance of the predicted future price.

Suggested Citation

  • William M. Boyce, 1970. "Stopping Rules for Selling Bonds," Bell Journal of Economics, The RAND Corporation, vol. 1(1), pages 27-53, Spring.
    • Handle: RePEc:rje:bellje:v:1:y:1970:i:spring:p:27-53
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    Cited by:

    1. Chun, Young Hak, 1997. "Rank-based selection strategies for the random walk process," European Journal of Operational Research, Elsevier, vol. 96(2), pages 417-427, January.
    2. Claudio Bellani & Damiano Brigo, 2021. "Mechanics of good trade execution in the framework of linear temporary market impact," Quantitative Finance, Taylor & Francis Journals, vol. 21(1), pages 143-163, January.
    3. Yang, Aijun & Liu, Yue & Xiang, Ju & Yang, Hongqiang, 2016. "Optimal buying at the global minimum in a regime switching model," Mathematical Social Sciences, Elsevier, vol. 84(C), pages 50-55.
    4. D'Auria, Bernardo & García Portugués, Eduardo & Guada Azze, Abel, 2021. "Optimal stopping of an Ornstein-Uhlenbeck bridge," DES - Working Papers. Statistics and Econometrics. WS 33508, Universidad Carlos III de Madrid. Departamento de Estadística.
    5. Yue Liu & Aijun Yang & Jijian Zhang & Jingjing Yao, 2020. "An Optimal Stopping Problem of Detecting Entry Points for Trading Modeled by Geometric Brownian Motion," Computational Economics, Springer;Society for Computational Economics, vol. 55(3), pages 827-843, March.
    6. Philip Ernst & Larry Shepp, 2016. "Revisiting a Theorem of L.A. Shepp on Optimal Stopping," Papers 1605.00762, arXiv.org.
    7. Abel Azze & Bernardo D'Auria & Eduardo Garc'ia-Portugu'es, 2022. "Optimal stopping of Gauss-Markov bridges," Papers 2211.05835, arXiv.org, revised Dec 2023.
    8. Tiziano De Angelis & Alessandro Milazzo, 2019. "Optimal stopping for the exponential of a Brownian bridge," Papers 1904.00075, arXiv.org, revised Nov 2019.
    9. Bernardo D’Auria & Eduardo García-Portugués & Abel Guada, 2020. "Discounted Optimal Stopping of a Brownian Bridge, with Application to American Options under Pinning," Mathematics, MDPI, vol. 8(7), pages 1-27, July.
    10. Janet S. Thatcher & John G. Thatcher, 1992. "An Empirical Test Of The Timing Of Bond-Refunding Decisions," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 15(3), pages 219-230, September.

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