Multi-dimensional optimal trade execution under stochastic resilience

Ulrich Horst () and Xiaonyu Xia ()
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Ulrich Horst: Humboldt University Berlin
Xiaonyu Xia: Humboldt University Berlin

Finance and Stochastics, 2019, vol. 23, issue 4, No 4, 889-923

Abstract: Abstract We provide a general framework for analysing multi-dimensional portfolio liquidation problems with instantaneous and persistent price impact and stochastic resilience. We show that the value function can be described by a system of multi-dimensional backward stochastic Riccati differential equations (BSRDEs) with a singular terminal condition. We prove the existence of a solution to the BSRDE system and characterise both the value function and the optimal strategy in terms of that solution. We prove that the solution to the liquidation problem can be approximated by the solutions to a sequence of unconstrained problems with increasing penalisation of open positions at the terminal time. Our proof is based on a novel a priori estimate for the approximating BSRDE systems, from which we infer the convergence of the optimal trading strategies for the unconstrained models to an admissible liquidation strategy for the original problem.

Keywords: Stochastic control; Multi-dimensional backward stochastic Riccati differential equations; Multi-dimensional portfolio liquidation problem; Singular terminal value; 93E20; 60H15; 91G80 (search for similar items in EconPapers)
JEL-codes: C02 C61 G33 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (15)

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DOI: 10.1007/s00780-019-00394-3

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