Optimal portfolio liquidation with limit orders
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Publication:4902233
DOI10.1137/110850475zbMATH Open1262.91160arXiv1106.3279OpenAlexW2148176228MaRDI QIDQ4902233FDOQ4902233
Authors: Olivier Guéant, Charles-Albert Lehalle, Joaquin Fernandez-Tapia 
Publication date: 25 January 2013
Published in: SIAM Journal on Financial Mathematics (Search for Journal in Brave)
Abstract: This paper addresses the optimal scheduling of the liquidation of a portfolio using a new angle. Instead of focusing only on the scheduling aspect like Almgren and Chriss, or only on the liquidity-consuming orders like Obizhaeva and Wang, we link the optimal trade-schedule to the price of the limit orders that have to be sent to the limit order book to optimally liquidate a portfolio. Most practitioners address these two issues separately: they compute an optimal trading curve and they then send orders to the markets to try to follow it. The results obtained here solve simultaneously the two problems. As in a previous paper that solved the "intra-day market making problem", the interactions of limit orders with the market are modeled via a Poisson process pegged to a diffusive "fair price" and a Hamilton-Jacobi-Bellman equation is used to solve the problem involving both non-execution risk and price risk. Backtests are carried out to exemplify the use of our results, both on long periods of time (for the entire liquidation process) and on slices of 5 minutes (to follow a given trading curve).
Full work available at URL: https://arxiv.org/abs/1106.3279
Recommendations
Portfolio theory (91G10) Hamilton-Jacobi equations (35F21) Existence theories for optimal control problems involving partial differential equations (49J20) Optimal stochastic control (93E20)
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