Optimal Portfolio Liquidation with Limit Orders

Olivier Gu\'eant, Charles-Albert Lehalle and Joaquin Fernandez Tapia

Papers from arXiv.org

Abstract: This paper addresses the optimal scheduling of the liquidation of a portfolio using a new angle. Instead of focusing only on the scheduling aspect like Almgren and Chriss, or only on the liquidity-consuming orders like Obizhaeva and Wang, we link the optimal trade-schedule to the price of the limit orders that have to be sent to the limit order book to optimally liquidate a portfolio. Most practitioners address these two issues separately: they compute an optimal trading curve and they then send orders to the markets to try to follow it. The results obtained here solve simultaneously the two problems. As in a previous paper that solved the "intra-day market making problem", the interactions of limit orders with the market are modeled via a Poisson process pegged to a diffusive "fair price" and a Hamilton-Jacobi-Bellman equation is used to solve the problem involving both non-execution risk and price risk. Backtests are carried out to exemplify the use of our results, both on long periods of time (for the entire liquidation process) and on slices of 5 minutes (to follow a given trading curve).

Date: 2011-06, Revised 2012-07
New Economics Papers: this item is included in nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (70)

Downloads: (external link)
http://arxiv.org/pdf/1106.3279 Latest version (application/pdf)

Related works:
Working Paper: Optimal Portfolio Liquidation with Limit Orders (2012)
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:arx:papers:1106.3279

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().