Portfolio Liquidation under Factor Uncertainty

Ulrich Horst, Xiaonyu Xia and Chao Zhou
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Ulrich Horst: HU Berlin
Xiaonyu Xia: HU Berlin
Chao Zhou: National University of Singapore

No 274, Rationality and Competition Discussion Paper Series from CRC TRR 190 Rationality and Competition

Abstract: We study an optimal liquidation problem under the ambiguity with respect to price impact parameters. Our main results show that the value function and the optimal trading strategy can be characterized by the solution to a semi-linear PDE with superlinear gradient, monotone generator and singular terminal value. We also establish an asymptotic analysis of the robust model for small amounts of uncertainty and analyze the effect of robustness on optimal trading strategies and liquidation costs. In particular, in our model ambiguity aversion is observationally equivalent to increased risk aversion. This suggests that ambiguity aversion increases liquidation rates.

Keywords: stochastic control; uncertainty; portfolio liquidation; singular terminal value; superlinear growth gradient (search for similar items in EconPapers)
JEL-codes: E20 H30 (search for similar items in EconPapers)
Date: 2021-01-26
New Economics Papers: this item is included in nep-sea and nep-upt
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Citations: View citations in EconPapers (1)

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