GENERAL INTENSITY SHAPES IN OPTIMAL LIQUIDATION
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Publication:5262510
DOI10.1111/MAFI.12052zbMATH Open1331.91165arXiv1204.0148OpenAlexW2097372502MaRDI QIDQ5262510FDOQ5262510
Olivier Guéant, Charles-Albert Lehalle
Publication date: 15 July 2015
Published in: Mathematical Finance (Search for Journal in Brave)
Abstract: The classical literature on optimal liquidation, rooted in Almgren-Chriss models, tackles the optimal liquidation problem using a trade-off between market impact and price risk. Therefore, it only answers the general question of the optimal liquidation rhythm. The very question of the actual way to proceed with liquidation is then rarely dealt with. Our model, that incorporates both price risk and non-execution risk, is an attempt to tackle this question using limit orders. The very general framework we propose to model liquidation generalizes the existing literature on optimal posting of limit orders. We consider a risk-adverse agent whereas the model of Bayraktar and Ludkovski only tackles the case of a risk-neutral one. We consider very general functional forms for the execution process intensity, whereas Gu'eant et al. is restricted to exponential intensity. Eventually, we link the execution cost function of Almgren-Chriss models to the intensity function in our model, providing then a way to see Almgren-Chriss models as a limit of ours.
Full work available at URL: https://arxiv.org/abs/1204.0148
Portfolio theory (91G10) Applications of stochastic analysis (to PDEs, etc.) (60H30) Optimal stochastic control (93E20)
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