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Optimal trade execution under endogenous pressure to liquidate: Theory and numerical solutions

Pavol Brunovský, Aleš Černý and Ján Komadel

European Journal of Operational Research, 2018, vol. 264, issue 3, 1159-1171

Abstract: We study optimal liquidation of a trading position (so-called block order or meta-order) in a market with a linear temporary price impact (Kyle, 1985). We endogenize the pressure to liquidate by introducing a downward drift in the unaffected asset price while simultaneously ruling out short sales. In this setting the liquidation time horizon becomes a stopping time determined endogenously, as part of the optimal strategy. We find that the optimal liquidation strategy is consistent with the square-root law which states that the average price impact per share is proportional to the square root of the size of the meta-order (Bershova & Rakhlin,2013; Farmer et al., 2013; Donier et al., 2015; Tóth (2016).

Keywords: Optimal liquidation; Price impact; Square-root law; Singular boundary value problem; Stochastic optimal control (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:264:y:2018:i:3:p:1159-1171

DOI: 10.1016/j.ejor.2017.07.054

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