The Optimal Equity Selling Price with Endogenous Drawdown

Professor Zhenya LIU (University Aix-Marseille and Renmin University of China)

Abstract

In this paper, we propose the endogenous drawdown in an investor's reward function. The endogenous drawdown is the difference between the underlying process and its maximum related process. We find the optimal selling price is a function of the historical highest price, the weights of profit and loss in investor's reward function, and the characters of the underlying stochastic process. With the data of the S&P 500 Index and SSE Composite Index, we calculate the numerical solution of the optimal selling price with consideration of endogenous drawdown. Through the out-sample test, this optimal selling price performs well to sell before the price drops sharply.