Optimal Portfolio Liquidation for CARA Investors

Schied, Alexander and Schöneborn, Torsten (2007): Optimal Portfolio Liquidation for CARA Investors.

Abstract

We consider the finite-time optimal portfolio liquidation problem for a von Neumann-Morgenstern investor with constant absolute risk aversion (CARA). As underlying market impact model, we use the continuous-time liquidity model of Almgren and Chriss (2000). We show that the expected utility of sales revenues, taken over a large class of adapted strategies, is maximized by a deterministic strategy, which is explicitly given in terms of an analytic formula. The proof relies on the observation that the corresponding value function solves a degenerate Hamilton-Jacobi-Bellman equation with singular initial condition.

• Item Type: MPRA Paper
• Language: English
• Keywords: Liquidity; illiquid markets; optimal liquidation strategies; dynamic trading strategies; algorithmic trading; utility maximization
• Subjects: G - Financial Economics > G2 - Financial Institutions and Services > G24 - Investment Banking ; Venture Capital ; Brokerage ; Ratings and Ratings Agencies; G - Financial Economics > G2 - Financial Institutions and Services > G20 - General; G - Financial Economics > G1 - General Financial Markets > G10 - General

References

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