Optimal Liquidation Strategies in Illiquid Markets
47 Pages Posted: 9 Jul 2009
Date Written: November 2008
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
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