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Optimal Trading with General Signals and Liquidation in Target Zone Models

Christoph Belak, Johannes Muhle-Karbe and Kevin Ou

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Abstract: We study optimal trading in an Almgren-Chriss model with running and terminal inventory costs and general predictive signals about price changes. As a special case, this allows to treat optimal liquidation in "target zone models": asset prices with a reflecting boundary enforced by regulatory interventions. In this case, the optimal liquidation rate is the "theta" of a lookback option, leading to explicit formulas for Bachelier or Black-Scholes dynamics.

Date: 2018-08
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