Title: Outperforming a buy-and-hold model in an efficient market by maximising the probability of achieving the greatest return

Authors: Rory L. Terry; Dosse Toulaboe; Bobby K. Alexander

Addresses: College of Business and Entrepreneurship, Fort Hays State University, Hays, KS 67601, USA ' College of Business and Entrepreneurship, Fort Hays State University, Hays, KS 67601, USA ' College of Business and Entrepreneurship, Fort Hays State University, Hays, KS 67601, USA

Abstract: In this paper, we consider the problem of an investor who holds a binomial security and needs to sell it by a specific date. We formulate an optimal selling model that can be used to maximise the probability of achieving the greatest return from holding such a security. We test the model with a robust set of randomly-generated binomial distributions. Testing suggests that our model produces statistically significant improvements in mean-variance efficiency and accompanying improvements in the probability of achieving the greatest return, compared with a buy-and-hold model, when the model and test returns are produced by the same process. These results can be generalised to any stationary stochastic process.

Keywords: optimal selling strategy; optimal stopping; market timing; buy-and-hold models; efficient markets; binomial securities; stationary stochastic processes.

DOI: 10.1504/IJBD.2014.067403

International Journal of Bonds and Derivatives, 2014 Vol.1 No.2, pp.155 - 170

Received: 14 Aug 2014
Accepted: 01 Sep 2014

Published online: 14 Feb 2015 *

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