Optimal Liquidation Strategies in Illiquid Markets

47 Pages Posted: 9 Jul 2009

See all articles by Eric Jondeau

Eric Jondeau

University of Lausanne - Faculty of Business and Economics (HEC Lausanne); Swiss Finance Institute

Augusto Perilla

affiliation not provided to SSRN

Michael Rockinger

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne); Centre for Economic Policy Research (CEPR); Swiss Finance Institute

Date Written: November 2008

Abstract

In this paper, we consider block trading strategies and characterize the times when a block trade is a popular choice. We also study the economic relevance of optimal liquidation strategies by calibrating a recent and realistic microstructure model with data from the Paris Stock Exchange. We distinguish between two cases: one in which the parameters are constant throughout the day and one in which they vary over time. We present and solve an optimization problem incorporating this realistic microstructure model. Our model endogenizes the trading periods required before a position is liquidated. A comparative static exercise demonstrates the realism of our model. We also examine the model for bearish and bullish beliefs, demonstrating that volatility plays a role in determining the speed of trade execution.

Keywords: Optimal trading strategy, liquidity risk, price impact, high frequency data, microstructure

JEL Classification: G12

Suggested Citation

Jondeau, Eric and Perilla, Augusto and Rockinger, Georg Michael, Optimal Liquidation Strategies in Illiquid Markets (November 2008). Swiss Finance Institute Research Paper No. 09-24. Available at SSRN: https://ssrn.com/abstract=1431869 or http://dx.doi.org/10.2139/ssrn.1431869

Eric Jondeau

University of Lausanne - Faculty of Business and Economics (HEC Lausanne) ( email )

Extranef 232
Lausanne, 1012
Switzerland
+41 21 692 33 49 (Phone)

HOME PAGE: http://www.hec.unil.ch/ejondeau/

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Augusto Perilla

affiliation not provided to SSRN ( email )

Georg Michael Rockinger (Contact Author)

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne) ( email )

Unil Dorigny, Batiment Internef
Lausanne, 1015
Switzerland
+41 21 728 3348 (Phone)
+41+21 692 3435 (Fax)

HOME PAGE: http://www.hec.unil.ch/mrockinger

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

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