Buy-low and sell-high investment strategies are a recurrent theme in the considerations of many investors. In this paper, we consider an investor who aims at maximizing the expected discounted cash-flow that can be generated by sequentially buying and selling one share of a given asset at fixed transaction costs. We model the underlying asset price by means of a general one-dimensional Itô diffusion X, we solve the resulting stochastic control problem in a closed analytic form, and we completely characterize the optimal strategy. In particular, we show that, if 0 is a natural boundary point of X, e.g., if X is a geometric Brownian motion, then it is never optimal to sequentially buy and sell. On the other hand, we prove that, if 0 is an entrance point of X, e.g., if X is a mean-reverting constant elasticity of variance (CEV) process, then it may be optimal to sequentially buy and sell, depending on the problem data.
- optimal investment strategies
- optimal switching
- sequential entry and exit decisions
- variational inequalities