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Optimal deleveraging with nonlinear temporary price impact

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  • Chen, Jingnan
  • Feng, Liming
  • Peng, Jiming

Abstract

In this paper, we first propose a portfolio management model where the objective is to balance equity and liability. The asset price dynamics includes both permanent and temporary price impact, where the permanent impact is a linear function of the cumulative trading amount and the temporary impact is a kth (between 0 and 1) order power function of the instantaneous trading rate. We construct efficient frontiers to visualize the tradeoff between equity and liability and obtain analytical properties regarding the optimal trading strategies. In the second part, we further consider an optimal deleveraging problem with leverage constraints. It reduces to a non-convex polynomial optimization program with polynomial and box constraints. A Lagrangian method for solving the problem is presented and the quality of the solution is studied.

Suggested Citation

  • Chen, Jingnan & Feng, Liming & Peng, Jiming, 2015. "Optimal deleveraging with nonlinear temporary price impact," European Journal of Operational Research, Elsevier, vol. 244(1), pages 240-247.
    • Handle: RePEc:eee:ejores:v:244:y:2015:i:1:p:240-247
    DOI: 10.1016/j.ejor.2014.12.034
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    References listed on IDEAS

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    Cited by:

    1. Sadoghi, Amirhossein & Vecer, Jan, 2022. "Optimal liquidation problem in illiquid markets," European Journal of Operational Research, Elsevier, vol. 296(3), pages 1050-1066.
    2. Edirisinghe, Chanaka & Jeong, Jaehwan & Chen, Jingnan, 2021. "Optimal portfolio deleveraging under market impact and margin restrictions," European Journal of Operational Research, Elsevier, vol. 294(2), pages 746-759.
    3. Amirhossein Sadoghi & Jan Vecer, 2022. "Optimal liquidation problem in illiquid markets," Post-Print hal-03696768, HAL.
    4. Brunovský, Pavol & Černý, Aleš & Komadel, Ján, 2018. "Optimal trade execution under endogenous pressure to liquidate: Theory and numerical solutions," European Journal of Operational Research, Elsevier, vol. 264(3), pages 1159-1171.
    5. Hezhi Luo & Yuanyuan Chen & Xianye Zhang & Duan Li & Huixian Wu, 2020. "Effective Algorithms for Optimal Portfolio Deleveraging Problem with Cross Impact," Papers 2012.07368, arXiv.org, revised Jan 2021.

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