Optimal Trading with General Signals and Liquidation in Target Zone Models

8 Pages Posted: 15 Aug 2018

See all articles by Christoph Belak

Christoph Belak

University of Trier

Johannes Muhle-Karbe

Imperial College London - Department of Mathematics

Kevin Ou

Carnegie Mellon University - Department of Mathematical Sciences

Date Written: August 1, 2018

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.

Keywords: optimal trading, inventory costs, market impact, liquidation, target zone models

JEL Classification: G11, C61

Suggested Citation

Belak, Christoph and Muhle-Karbe, Johannes and Ou, Kevin, Optimal Trading with General Signals and Liquidation in Target Zone Models (August 1, 2018). Available at SSRN: https://ssrn.com/abstract=3224674 or http://dx.doi.org/10.2139/ssrn.3224674

Christoph Belak

University of Trier ( email )

Department IV - Mathematics
Universitätsring 19
Trier, 54296
Germany

HOME PAGE: http://www.belak.ch

Johannes Muhle-Karbe (Contact Author)

Imperial College London - Department of Mathematics ( email )

South Kensington Campus
Imperial College
LONDON, SW7 2AZ
United Kingdom

Kevin Ou

Carnegie Mellon University - Department of Mathematical Sciences ( email )

Pittsburgh, PA 15213-3890
United States

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