Smooth solutions to portfolio liquidation problems under price-sensitive market impact
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Publication:681996
DOI10.1016/J.SPA.2017.06.013zbMATH Open1380.93287arXiv1309.0474OpenAlexW2125406222MaRDI QIDQ681996FDOQ681996
Authors: Paulwin Graewe, Ulrich Horst, Éric Séré 
Publication date: 13 February 2018
Published in: Stochastic Processes and their Applications (Search for Journal in Brave)
Abstract: We consider the stochastic control problem of a financial trader that needs to unwind a large asset portfolio within a short period of time. The trader can simultaneously submit active orders to a primary market and passive orders to a dark pool. Our framework is flexible enough to allow for price-dependent impact functions describing the trading costs in the primary market and price-dependent adverse selection costs associated with dark pool trading. We prove that the value function can be characterized in terms of the unique smooth solution to a PDE with singular terminal value, establish its explicit asymptotic behavior at the terminal time, and give the optimal trading strategy in feedback form.
Full work available at URL: https://arxiv.org/abs/1309.0474
Recommendations
Stochastic partial differential equations (aspects of stochastic analysis) (60H15) PDEs in connection with control and optimization (35Q93) Financial applications of other theories (91G80) Optimal stochastic control (93E20)
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