A singular differential equation stemming from an optimal control problem in financial economics

DOI10.1007/S00245-013-9205-5MaRDI QIDQ2441469zbMATH OpenOpenAlexWikidataFDO

Authors Aleš Černý, Michael Winkler, Pavol Brunovský

Publication date 24 March 2014

Published in Applied Mathematics and Optimization (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1209.5027, https://openaccess.city.ac.uk/id/eprint/5938/1/1209.5027v2.pdf

zbMATH Keywords

nonuniqueness.Ordinary differential equationssubsolutionsupersolution

Mathematics Subject Classification ID

Initial value problems, existence, uniqueness, continuous dependence and continuation of solutions to ordinary differential equations (34A12) Applications of optimal control and differential games (49N90) Auctions, bargaining, bidding and selling, and other market models (91B26)

Abstract: We consider the ordinary differential equation $x^2{u}^{″}=ax{u}^{\prime }+bu-c(u^{\prime }-1{)}^2,xin(0,x_0)$, with $ainmathbbR,binmathbbR$, $c>0$ and the singular initial condition $u(0)=0$, which in financial economics describes optimal disposal of an asset in a market with liquidity effects. It is shown in the paper that if $a+b<0$ then no solutions exist, whereas if $a+bge0$ then there are infinitely many solutions with indistinguishable asymptotics near 0. Moreover, it is proved that in the latter case there is precisely one solution $u$ corresponding to the choice $x_0=infty$ which is such that $0leu(x)lex$ for all $x>0$, and that this solution is strictly increasing and concave.

Review text

The authors consider the following initial value problem \[ x^2u=axu'+bu-c(u'-1)^2, \;u(0)=0, \] where \(x\in (0, x_0)\), \(a, b\in \mathbb{R}\), and \(c>0\). The problem arises from a model of optimal liquidation of a large quantity of an asset whose market price is affected by its ongoing sale. The authors prove that for \(a+b>0\) the considered problem has a continuum of local solutions and one global bounded solution, while for \(a+b<0\) no solution exists. Moreover, they analyze monotonicity and convexity properties of the global solution.

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Cites work

• A singular initial value problem and self-similar solutions of a nonlinear dissipative wave equation
• Existence of infinitely many solutions for second-order singular initial value problems with an application to nonlinear massive gravity
• scientific article; zbMATH DE number 1069620 (Why is no real title available?)
• scientific article; zbMATH DE number 3204015 (Why is no real title available?)
• Two-point boundary value problems. Lower and upper solutions

Cited in

(5)

• Optimal trade execution under endogenous pressure to liquidate: theory and numerical solutions
• A problem of symmetric variational equation
• Higher order asymptotics of solutions of a singular ODE
• The deterministic optimal liquidation problem
• On the numerical analysis and visualisation of implicit ordinary differential equations

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