Optimal liquidation policies of redeemable shares

Anna Battauz and Francesco Rotondi ()
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Anna Battauz: Baffi and IGIER, Bocconi University Milan
Francesco Rotondi: Bocconi University

Computational Management Science, 2024, vol. 21, issue 2, No 8, 32 pages

Abstract: Abstract In this paper we explore the optimal issuance and liquidation of redeemable shares. Redeemable shares are those that the issuer can repurchase, or redeem, at a predetermined price, known as the call price, as soon as a given barrier event is triggered. We first determine the optimal call price for the issuer by stating and solving a stylized earning per share maximization problem from the point of view of a company. Once the call price is determined, we focus on the valuation of both perpetual and finite-maturity redeemable shares and we examine the problem of their optimal liquidation from the point of view of a shareholder holding them. Along with the few closed-form results that can be obtained in a lognormal continuous-time framework, we propose an intuitive and flexible method to retrieve the optimal liquidation policy in the form of a liquidation boundary, thanks to a parsimonious Markovianization of the evaluation problem in a binomial framework. Numerical tests using alternative market models and different dividend formulations confirm the robustness of our results.

Keywords: Redeemable shares; Call price; American option; Optimal stopping; Variational inequality; Optimal liquidation; Primary: 91G20; 60G40; Secondary: 60J60, 35R35, 45G10, 49J20, 91G50 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s10287-024-00526-x

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