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Optimal Liquidation Problems in a Randomly-Terminated Horizon

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  • Qing-Qing Yang
  • Wai-Ki Ching
  • Jia-Wen Gu
  • Tak Kwong Wong

Abstract

In this paper, we study optimal liquidation problems in a randomly-terminated horizon. We consider the liquidation of a large single-asset portfolio with the aim of minimizing a combination of volatility risk and transaction costs arising from permanent and temporary market impact. Three different scenarios are analyzed under Almgren-Chriss's market impact model to explore the relation between optimal liquidation strategies and potential inventory risk arising from the uncertainty of the liquidation horizon. For cases where no closed-form solutions can be obtained, we verify comparison principles for viscosity solutions and characterize the value function as the unique viscosity solution of the associated Hamilton-Jacobi-Bellman (HJB) equation.

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  • Qing-Qing Yang & Wai-Ki Ching & Jia-Wen Gu & Tak Kwong Wong, 2017. "Optimal Liquidation Problems in a Randomly-Terminated Horizon," Papers 1709.05837, arXiv.org.
    • Handle: RePEc:arx:papers:1709.05837
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    References listed on IDEAS

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