Optimal liquidation under partial information with price impact

DOI10.1016/J.SPA.2019.06.004zbMATH Open1444.91196arXiv1606.05079OpenAlexW2952128494WikidataQ127645269 ScholiaQ127645269MaRDI QIDQ1986008FDOQ1986008

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)

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.

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

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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)

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Cited In (14)

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

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