An optimal execution problem with market impact
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Publication:457189
DOI10.1007/S00780-014-0232-0zbMATH Open1403.91344arXiv0907.3282OpenAlexW3121867036MaRDI QIDQ457189FDOQ457189
Authors: Takashi Kato 
Publication date: 26 September 2014
Published in: Finance and Stochastics (Search for Journal in Brave)
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.
Full work available at URL: https://arxiv.org/abs/0907.3282
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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)
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Cited In (47)
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