Optimal Basket Liquidation for CARA Investors is Deterministic
University of Mannheim
AHL (Man Investments); University of Oxford - Oxford-Man Institute of Quantitative Finance
University of Cambridge
February 23, 2010
We consider the problem faced by an investor who must liquidate a given basket of assets over a finite time horizon. The investor’s goal is to maximize the expected utility of the sales revenues over a class of adaptive strategies. We assume that the investor’s utility has constant absolute risk aversion (CARA) and that the asset prices are given by a very general continuous-time, multi-asset price impact model. Our main result is that (perhaps surprisingly) the investor does no worse if he narrows his search to deterministic strategies. In the case where the asset prices are given by an extension of the nonlinear price impact model of Almgren (2003), we characterize the unique optimal strategy via the solution of a Hamilton equation and the value function via a nonlinear partial differential equation with singular initial condition.
Number of Pages in PDF File: 19
Keywords: Liquidity, illiquid markets, optimal liquidation strategies, dynamic trading strategies, algorithmic trading, utility maximization
JEL Classification: G10, G12, G20, G24, G33working papers series
Date posted: November 6, 2009 ; Last revised: February 24, 2010
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