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Optimal filter rules for selling stocks in the emerging stock markets

Author

Listed:
  • Sabri Boubaker

    (Métis Lab EM Normandie - EM Normandie - École de Management de Normandie = EM Normandie Business School)

  • Xuyuan Han
  • Zhenya Liu

    (CERGAM - Centre d'Études et de Recherche en Gestion d'Aix-Marseille - AMU - Aix Marseille Université - UTLN - Université de Toulon, Renmin University of China = Université Renmin de Chine)

  • Yaosong Zhan

    (Renmin University of China = Université Renmin de Chine)

Abstract

With the application of the optimal stopping techniques, this paper proposes a filter rule for investors in emerging stock markets. In a bull market, once the stock price falls down to the optimal filter size, investors should sell the stock to avoid massive losses. We show that the optimal filter size is a function of the historical highest price, the weights of the future returns and the current drawdown in the investor's utility function, the characteristics of the underlying stochastic price process, and the discount rate. Out-of-sample tests verify that this filter rule is valid, and the selling signals generated by the filter rule are at the beginning of the downtrend in the most emerging stock markets.

Suggested Citation

  • Sabri Boubaker & Xuyuan Han & Zhenya Liu & Yaosong Zhan, 2023. "Optimal filter rules for selling stocks in the emerging stock markets," Post-Print hal-03511438, HAL.
  • Handle: RePEc:hal:journl:hal-03511438
    DOI: 10.1007/s10479-021-04381-w
    as

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    References listed on IDEAS

    as
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    Cited by:

    1. Zhenya Liu & Yuhao Mu, 2022. "Optimal Stopping Methods for Investment Decisions: A Literature Review," IJFS, MDPI, vol. 10(4), pages 1-23, October.

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    More about this item

    Keywords

    Finance; Filter rule; Optimal stopping; Emerging stock markets;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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