Optimal Trading with General Signals and Liquidation in Target Zone Models
8 Pages Posted: 15 Aug 2018
Date Written: August 1, 2018
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.
Keywords: optimal trading, inventory costs, market impact, liquidation, target zone models
JEL Classification: G11, C61
Suggested Citation: Suggested Citation