Smooth solutions to portfolio liquidation problems under price-sensitive market impact

Paulwin Graewe, Ulrich Horst and Eric Séré

Stochastic Processes and their Applications, 2018, vol. 128, issue 3, 979-1006

Abstract: We consider the stochastic control problem of a financial trader that needs to unwind a large asset portfolio within a short period of time. The trader can simultaneously submit active orders to a primary market and passive orders to a dark pool. Our framework is flexible enough to allow for price-dependent impact functions describing the trading costs in the primary market and price-dependent adverse selection costs associated with dark pool trading. We prove that the value function can be characterized in terms of the unique smooth solution to a PDE with singular terminal value, establish its explicit asymptotic behavior at the terminal time, and give the optimal trading strategy in feedback form.

Keywords: Stochastic optimal control; Portfolio liquidation; Singular terminal value (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (15)

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DOI: 10.1016/j.spa.2017.06.013

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