Optimal liquidation of financial derivatives

Jingnan Chen

Finance Research Letters, 2020, vol. 34, issue C

Abstract: We propose a two-period robust optimization model for portfolio liquidation under a cash requirement that finds the least costly liquidation strategy. The basic asset return is assumed to belong to a scaled ellipsoid while the derivative return is modeled as a quadratic function of the underlying asset return via delta-gamma approximation. We show that the robust liquidation model is equivalent to a computationally tractable semidefinite program. We obtain analytical properties regarding how derivative Greek letters affect the optimal liquidation strategy.

Keywords: Robust portfolio liquidation; Financial derivatives; Delta-gamma approximation; Greek letters; Semidefinite program (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:34:y:2020:i:c:s1544612319300662

DOI: 10.1016/j.frl.2019.07.006

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