Three-Dimensional Brownian Motion and the Golden Ratio Rule
Let X =(Xt)t=0 be a transient diffusion processin (0,8) with the diffusion coeffcient s> 0 and the scale function L such that Xt ?8 as t ?8 ,let It denote its running minimum for t = 0, and let ? denote the time of its ultimate minimum I8 .Setting c(i,x)=1-2L(x)/L(i) we show that the stopping time minimises E(|? - t|- ?) over all stopping times t of X (with finite mean) where the optimal boundary f* can be characterised as the minimal solution to staying strictly above the curve h(i)= L-1(L(i)/2) for i > 0. In particular, when X is the radial part of three-dimensional Brownian motion, we find that where ? =(1+v5)/2=1.61 ... is the golden ratio. The derived results are applied to problems of optimal trading in the presence of bubbles where we show that the golden ratio rule offers a rigourous optimality argument for the choice of the well known golden retracement in technical analysis of asset prices.
Year of publication: |
2011-08-01
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Authors: | Glover, Kristoffer ; Hulley, Hardy ; Peskir, Goran |
Institutions: | Finance Discipline Group, Business School |
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