Optimal liquidation under partial information with price impact

DOI10.1016/J.SPA.2019.06.004MaRDI QIDQ1986008zbMATH OpenOpenAlexWikidataFDO

Authors Katia Colaneri, Zehra Eksi, Rüdiger Frey, Michaela Szölgyenyi

Publication date 7 April 2020

Published in Stochastic Processes and their Applications (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1606.05079

zbMATH Keywords

piecewise deterministic Markov processoptimal liquidationstochastic filteringviscosity solutions and comparison principle

Mathematics Subject Classification ID

Applications of Markov chains and discrete-time Markov processes on general state spaces (social mobility, learning theory, industrial processes, etc.) (60J20) Portfolio theory (91G10) Optimal stochastic control (93E20)

Abstract: We study the optimal liquidation problem in a market model where the bid price follows a geometric pure jump process whose local characteristics are driven by an unobservable finite-state Markov chain and by the liquidation rate. This model is consistent with stylized facts of high frequency data such as the discrete nature of tick data and the clustering in the order flow. We include both temporary and permanent effects into our analysis. We use stochastic filtering to reduce the optimal liquidation problem to an equivalent optimization problem under complete information. This leads to a stochastic control problem for piecewise deterministic Markov processes (PDMPs). We carry out a detailed mathematical analysis of this problem. In particular, we derive the optimality equation for the value function, we characterize the value function as continuous viscosity solution of the associated dynamic programming equation, and we prove a novel comparison result. The paper concludes with numerical results illustrating the impact of partial information and price impact on the value function and on the optimal liquidation rate.

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Cited in

(14)

• Optimal execution with multiplicative price impact and incomplete information on the return
• Stochastic filtering of a pure jump process with predictable jumps and path-dependent local characteristics
• Optimal Execution: A Review
• Optimal asset liquidation with multiplicative transient price impact
• Optimal market making under partial information with general intensities
• Trading strategy with stochastic volatility in a limit order book market
• Portfolio optimization for a large investor controlling market sentiment under partial information
• Optimal liquidation under stochastic price impact
• Classical solutions of the backward PIDE for Markov modulated marked point processes and applications to CAT bonds
• Optimal reduction of public debt under partial observation of the economic growth
• Approximation methods for piecewise deterministic Markov processes and their costs
• Optimal liquidation in a finite time regime switching model with permanent and temporary pricing impact
• Stochastic filtering and optimal control of pure jump Markov processes with noise-free partial observation
• Optimal selling of an asset with jumps under incomplete information

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