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Optimal Liquidation Strategies Regularize Portfolio Selection

Author

Listed:
  • Fabio Caccioli
  • Susanne Still
  • Matteo Marsili
  • Imre Kondor

Abstract

We consider the problem of portfolio optimization in the presence of market impact, and derive optimal liquidation strategies. We discuss in detail the problem of finding the optimal portfolio under Expected Shortfall (ES) in the case of linear market impact. We show that, once market impact is taken into account, a regularized version of the usual optimization problem naturally emerges. We characterize the typical behavior of the optimal liquidation strategies, in the limit of large portfolio sizes, and show how the market impact removes the instability of ES in this context.

Suggested Citation

  • Fabio Caccioli & Susanne Still & Matteo Marsili & Imre Kondor, 2010. "Optimal Liquidation Strategies Regularize Portfolio Selection," Papers 1004.4169, arXiv.org, revised Feb 2011.
    • Handle: RePEc:arx:papers:1004.4169
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    Cited by:

    1. Daniel Fricke, 2019. "Are specialist funds “special”?," Financial Management, Financial Management Association International, vol. 48(2), pages 441-472, June.
    2. Caccioli, Fabio & Kondor, Imre & Papp, Gábor, 2015. "Portfolio optimization under expected shortfall: contour maps of estimation error," LSE Research Online Documents on Economics 119463, London School of Economics and Political Science, LSE Library.
    3. Imre Kondor & G'abor Papp & Fabio Caccioli, 2016. "Analytic solution to variance optimization with no short-selling," Papers 1612.07067, arXiv.org, revised Jan 2017.
    4. Varga-Haszonits, Istvan & Caccioli, Fabio & Kondor, Imre, 2016. "Replica approach to mean-variance portfolio optimization," LSE Research Online Documents on Economics 68955, London School of Economics and Political Science, LSE Library.
    5. Papp, Gábor & Caccioli, Fabio & Kondor, Imre, 2019. "Bias-variance trade-off in portfolio optimization under expected shortfall with ℓ 2 regularization," LSE Research Online Documents on Economics 100294, London School of Economics and Political Science, LSE Library.
    6. Axel Pruser & Imre Kondor & Andreas Engel, 2021. "Aspects of a phase transition in high-dimensional random geometry," Papers 2105.04395, arXiv.org, revised Jun 2021.
    7. Imre Kondor & Fabio Caccioli & G'abor Papp & Matteo Marsili, 2015. "Contour map of estimation error for Expected Shortfall," Papers 1502.06217, arXiv.org.
    8. Fabio Caccioli & Imre Kondor & Matteo Marsili & Susanne Still, 2014. "$L_p$ regularized portfolio optimization," Papers 1404.4040, arXiv.org.
    9. Longfeng Zhao & Chao Wang & Gang-Jin Wang & H. Eugene Stanley & Lin Chen, 2021. "Community detection and portfolio optimization," Papers 2112.13383, arXiv.org.
    10. Imre Kondor, 2014. "Estimation Error of Expected Shortfall," Papers 1402.5534, arXiv.org.
    11. Papp, Gábor & Kondor, Imre & Caccioli, Fabio, 2021. "Optimizing expected shortfall under an ℓ1 constraint—an analytic approach," LSE Research Online Documents on Economics 111051, London School of Economics and Political Science, LSE Library.
    12. Zhao, Longfeng & Wang, Gang-Jin & Wang, Mingang & Bao, Weiqi & Li, Wei & Stanley, H. Eugene, 2018. "Stock market as temporal network," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 506(C), pages 1104-1112.
    13. Istvan Varga-Haszonits & Fabio Caccioli & Imre Kondor, 2016. "Replica approach to mean-variance portfolio optimization," Papers 1606.08679, arXiv.org.
    14. G'abor Papp & Fabio Caccioli & Imre Kondor, 2016. "Bias-variance trade-off in portfolio optimization under Expected Shortfall with $\ell_2$ regularization," Papers 1602.08297, arXiv.org, revised Jul 2018.
    15. G'abor Papp & Imre Kondor & Fabio Caccioli, 2021. "Optimizing Expected Shortfall under an $\ell_1$ constraint -- an analytic approach," Papers 2103.04375, arXiv.org.
    16. Fabio Caccioli & Imre Kondor & Matteo Marsili & Susanne Still, 2016. "Liquidity Risk And Instabilities In Portfolio Optimization," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 19(05), pages 1-28, August.
    17. Fabio Caccioli & Imre Kondor & G'abor Papp, 2015. "Portfolio Optimization under Expected Shortfall: Contour Maps of Estimation Error," Papers 1510.04943, arXiv.org.
    18. Fabio Caccioli & Imre Kondor & G'abor Papp, 2015. "Portfolio Optimization under Expected Shortfall: Contour Maps of Estimation Error," Papers 1510.04943, arXiv.org.
    19. Yi Li & Ju’e Guo & Kin Keung Lai & Jinzhao Shi, 2022. "Optimal portfolio liquidation with cross-price impacts on trading," Operational Research, Springer, vol. 22(2), pages 1083-1102, April.
    20. Fabio Caccioli & Jean-Philippe Bouchaud & J. Doyne Farmer, 2012. "A proposal for impact-adjusted valuation: Critical leverage and execution risk," Papers 1204.0922, arXiv.org, revised Aug 2012.

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