An optimal execution problem with market impact
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Derivative securities (option pricing, hedging, etc.) (91G20) Dynamic programming in optimal control and differential games (49L20) Viscosity solutions to Hamilton-Jacobi equations in optimal control and differential games (49L25) Financial applications of other theories (91G80) Optimal stochastic control (93E20)
Abstract: We study an optimal execution problem in a continuous-time market model that considers market impact. We formulate the problem as a stochastic control problem and investigate properties of the corresponding value function. We find that right-continuity at the time origin is associated with the strength of market impact for large sales, otherwise the value function is continuous. Moreover, we show the semi-group property (Bellman principle) and characterise the value function as a viscosity solution of the corresponding Hamilton-Jacobi-Bellman equation. We introduce some examples where the forms of the optimal strategies change completely, depending on the amount of the trader's security holdings and where optimal strategies in the Black-Scholes type market with nonlinear market impact are not block liquidation but gradual liquidation, even when the trader is risk-neutral.
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Cited in
(47)- Optimal trading with signals and stochastic price impact
- Dynamic optimal execution in a mixed-market-impact Hawkes price model
- Drift dependence of optimal trade execution strategies under transient price impact
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- Optimal execution with nonlinear impact functions and trading-enhanced risk
- Optimal execution considering trading signal and execution risk simultaneously
- Optimal investment with transient price impact
- Curve following in illiquid markets
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- Explicit solution for constrained optimal execution problem with general correlated market depth
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- Optimal execution in a market with small investors
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- On a class of singular stochastic control problems driven by Lévy noise
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- Stability for gains from large investors' strategies in \(M_{1}/J_{1}\) topologies
- Optimal execution cost for liquidation through a limit order market
- Periodic strategies in optimal execution with multiplicative price impact
- The optimal execution strategy of employee stock options
- A class of optimal liquidation problem with a nonlinear temporary market impact
- Finite horizon optimal execution with bounded rate of transaction
- Optimal and equilibrium execution strategies with generalized price impact
- Optimal solution of the liquidation problem under execution and price impact risks
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