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When to Sell Apple and the NASDAQ? Trading Bubbles with a Stochastic Disorder Model

19 Pages Posted: 28 Oct 2013  

A.N. Shiryaev

Steklov Mathematical Institute

Mikhail Zhitlukhin

Steklov Mathematical Institute

William T. Ziemba

University of British Columbia (UBC) - Sauder School of Business

Date Written: January 8, 2013

Abstract

In this paper, the authors apply a continuous time stochastic process model developed by Shiryaev and Zhutlukhin for optimal stopping of random price processes that appear to be bubbles. By a bubble we mean the rising price is largely based on the expectation of higher and higher future prices. Futures traders such as George Soros attempt to trade such markets. The idea is to exit near the peak from a starting long position. The model applies equally well on the short side, that is when to enter and exit a short position. In this paper we test the model in two technology markets. These include the price of Apple computer stock AAPL from various times in 2009{2012 after the local low of March 6, 2009; plus a market where it is known that the generally very successful bubble trader George Soros lost money by shorting the NASDAQ-100 stock index too soon in 2000. The Shiryaev-Zhitlukhin model provides good exit points in both situations that would have been pro table to speculators following the model. who employed the model.

Keywords: bubbles, Soros trading, Apple Computer Inc., NASDAQ 100

JEL Classification: B25, C63, E44, E65, G12

Suggested Citation

Shiryaev, A.N. and Zhitlukhin, Mikhail and Ziemba, William T., When to Sell Apple and the NASDAQ? Trading Bubbles with a Stochastic Disorder Model (January 8, 2013). Available at SSRN: https://ssrn.com/abstract=2200556 or http://dx.doi.org/10.2139/ssrn.2200556

A.N. Shiryaev

Steklov Mathematical Institute ( email )

Gubkina St. 8
Moscow, 117966

Mikhail Zhitlukhin

Steklov Mathematical Institute ( email )

Gubkina St. 8
Moscow, 117966
United States

William T. Ziemba (Contact Author)

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
604-261-1343 (Phone)
604-263-9572 (Fax)

HOME PAGE: http://williamtziemba.com

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