Optimal Liquidation Problems in a Randomly-Terminated Horizon

Qing-Qing Yang, Wai-Ki Ching, Jia-Wen Gu and Tak Kwong Wong

Papers from arXiv.org

Abstract: In this paper, we study optimal liquidation problems in a randomly-terminated horizon. We consider the liquidation of a large single-asset portfolio with the aim of minimizing a combination of volatility risk and transaction costs arising from permanent and temporary market impact. Three different scenarios are analyzed under Almgren-Chriss's market impact model to explore the relation between optimal liquidation strategies and potential inventory risk arising from the uncertainty of the liquidation horizon. For cases where no closed-form solutions can be obtained, we verify comparison principles for viscosity solutions and characterize the value function as the unique viscosity solution of the associated Hamilton-Jacobi-Bellman (HJB) equation.

Date: 2017-09
New Economics Papers: this item is included in nep-rmg
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