Optimal Portfolio Liquidation for CARA Investors

Alexander Schied and Torsten Schöneborn

MPRA Paper from University Library of Munich, Germany

Abstract: We consider the finite-time optimal portfolio liquidation problem for a von Neumann-Morgenstern investor with constant absolute risk aversion (CARA). As underlying market impact model, we use the continuous-time liquidity model of Almgren and Chriss (2000). We show that the expected utility of sales revenues, taken over a large class of adapted strategies, is maximized by a deterministic strategy, which is explicitly given in terms of an analytic formula. The proof relies on the observation that the corresponding value function solves a degenerate Hamilton-Jacobi-Bellman equation with singular initial condition.

Keywords: Liquidity; illiquid markets; optimal liquidation strategies; dynamic trading strategies; algorithmic trading; utility maximization (search for similar items in EconPapers)
JEL-codes: G10 G20 G24 (search for similar items in EconPapers)
Date: 2007-09-27
New Economics Papers: this item is included in nep-dge, nep-fmk and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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