Adaptive basket liquidation

DOI10.1007/S00780-016-0290-6MaRDI QIDQ287672zbMATH OpenOpenAlexFDO

Authors Torsten Schöneborn

Publication date 23 May 2016

Published in Finance and Stochastics (Search for Journal in Brave)

Full work available at URL https://doi.org/10.1007/s00780-016-0290-6

zbMATH Keywords

cross-asset impactdynamic trading strategiesoptimal basket liquidationseparation theoremvon Neumann-Morgenstern investor

Mathematics Subject Classification ID

Degenerate parabolic equations (35K65) Portfolio theory (91G10) Control/observation systems governed by partial differential equations (93C20)

Review text

This paper deals with the infinite-horizon optimal basket portfolio liquidation problem for a von Neumann-Morgenstern investor in a multi-asset extension of the liquidity model of Almgren with cross-asset impact. The author shows that a unique mean-variance optimal trading strategy exists and that it satisfies both Bellman's principle of optimality and the Beltrami identity. It is shown that the mean-variance costs of liquidation fulfill the dynamic programming partial differential equation. Then it is constructed a solution to the HJB equation for utility maximization. The author constructs the utility maximization value function by solving two-dimensional partial differential equation. Using a verification argument it is shown that the solution to the HJB equation is indeed the value function. It is found that the set of portfolios that are held during the liquidation is independent of the investor's utility function and only depends on the market volatility and liquidity structure. The utility function only influences how quickly the investor executes the trades. The partial differential equations for both the sequence of portfolios reached during the execution and the trading speed are derived.

Recommendations

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Cites work

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Cited in

(9)

• Rebalancing multiple assets with mutual price impact
• Monte Carlo methods via a dual approach for some discrete time stochastic control problems
• Multi-dimensional optimal trade execution under stochastic resilience
• Optimal basket liquidation for CARA investors is deterministic
• Optimal deleveraging with nonlinear temporary price impact
• Cross-impact and no-dynamic-arbitrage
• Optimal time to exchange two baskets
• Optimal liquidation trajectories for the Almgren-Chriss model
• Optimal liquidation of a basket of stocks using reinforcement learning

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