Optimal Liquidation

37 Pages Posted: 15 Jan 1998

See all articles by Robert Almgren

Robert Almgren

University of Toronto - Department of Mathematics

Neil A Chriss

Hutchin Hill Capital

Date Written: November 24, 1997

Abstract

We consider the problem of portfolio liquidation with the aim of minimizing a combination of volatility risk and transaction costs arising from permanent and temporary market impact. For a simple linear cost model, we explicitly construct the efficient frontier in the space of time-dependent liquidation strategies, which have minimum expected cost for a given level of uncertainty. We consider the risk-reward tradeoff both from the point of view of classic mean-variance optimization, and from the standpoint of Value at Risk. This analysis leads to general insights into optimal portfolio trading, and to several applications including a definition of liquidity-adjusted value at risk.

JEL Classification: G1

Suggested Citation

Almgren, Robert and Chriss, Neil A., Optimal Liquidation (November 24, 1997). Available at SSRN: https://ssrn.com/abstract=53501 or http://dx.doi.org/10.2139/ssrn.53501

Robert Almgren (Contact Author)

University of Toronto - Department of Mathematics ( email )

Toronto, Ontario M5S 3G3
Canada

Neil A. Chriss

Hutchin Hill Capital ( email )

142 West 57th Street
New York, NY 10019
United States

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