Risk aversion and the dynamics of optimal liquidation strategies in illiquid markets (Q964670)

The paper is devoted to the infinite-horizon optimal portfolio liquidation problem for a von Neumann-Morgenstern investor in the liquidity model of \textit{R. E. Almgren} [Appl. Math. Finance 10, No. 1, 1--18 (2003; Zbl 1064.91058)]. The goal is to determine the adaptive trading strategy that maximizes the expected utility of the proceeds of an asset sale. The authors pursue a stochastic control approach and show that the value function and optimal control satisfy certain nonlinear parabolic partial differential equations. The approach to the PDE characterization of the value function and the optimal strategy essentially deviates from the standard paradigm since the steps in the solving of HJB equation are reversed. Such PDE characterization facilitates a qualitative sensitivity analysis of the optimal strategy and the value function. The sensitivities of the value function and the optimal strategy with respect to the various model parameters are analyzed. The qualitative results are proved by combining probabilistic and analytic arguments.