Let's say I have the stock of General Motors and I assume some fancy model for the price of this stock and I have to sell it within a month. Can I use Longstaff-Schwartz algorithm to determine the best time to sell the stock? I'm asking because I noticed that the algorithm seems to be used only for derivatives, but isn't it more natural to use it to determine when is the best time to sell any asset?
Add a comment
|
1 Answer
$\begingroup$
$\endgroup$
2
To solve a standard optimal stopping problem (say Markovian, finite horizon), you must calculate certain conditional expectations that arise in the dynamic programming principle algorithm. These conditional expectations can be approximated using Longstaff-Schwartz or the Tsitsiklis-Van Roy approach, among others.
-
$\begingroup$ Thank you for the answer! So it is applicable. Do you know any reason for why it is not applied to find best time to sell a stock? It does look like a cool application. $\endgroup$– QwertyNov 6, 2020 at 21:11
-
1$\begingroup$ If you're looking at a 1D problem, if the dynamics for your stock price are not too complex, there are usually better approaches. Monte Carlo approaches have issues with slow convergence, and the regression component often contributes a bias in estimated values. $\endgroup$– d_797Nov 6, 2020 at 21:33