Analytical Results and Efficient Algorithm for Optimal Portfolio Deleveraging with Market Impact

Jingnan Chen (), Liming Feng (), Jiming Peng () and Yinyu Ye ()
Additional contact information
Jingnan Chen: Department of Industrial and Enterprise Systems Engineering, University of Illinois at Urbana--Champaign, Urbana, Illinois 61801
Liming Feng: Department of Industrial and Enterprise Systems Engineering, University of Illinois at Urbana--Champaign, Urbana, Illinois 61801
Jiming Peng: Department of Industrial Engineering, University of Houston, Houston, Texas 77004
Yinyu Ye: Department of Management Science and Engineering, Stanford University, Stanford, California 94305

Operations Research, 2014, vol. 62, issue 1, 195-206

Abstract: In this paper, we consider an optimal portfolio deleveraging problem, where the objective is to meet specified debt/equity requirements at the minimal execution cost. Permanent and temporary price impact is taken into account. With no restrictions on the relative magnitudes of permanent and temporary price impact, the optimal deleveraging problem reduces to a nonconvex quadratic program with quadratic and box constraints. Analytical results on the optimal deleveraging strategy are obtained. They provide guidance on how we liquidate a portfolio according to endogenous and exogenous factors. A Lagrangian method is proposed to solve the nonconvex quadratic program numerically. By studying the breakpoints of the Lagrangian problem, we obtain conditions under which the Lagrangian method returns an optimal solution of the deleveraging problem. When the Lagrangian algorithm returns a suboptimal approximation, we present upper bounds on the loss in equity caused by using such an approximation.

Keywords: optimal deleveraging; permanent and temporary price impact; nonconvex quadratic program; Lagrangian method; breakpoint (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
http://dx.doi.org/10.1287/opre.2013.1222 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:oropre:v:62:y:2014:i:1:p:195-206

Access Statistics for this article

More articles in Operations Research from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().