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Research on Portfolio Liquidation Strategy under Discrete Times

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  • Qixuan Luo
  • Yu Shi
  • Handong Li

Abstract

This paper presents an optimal strategy for portfolio liquidation under discrete time conditions. We assume that N risky assets held will be liquidated according to the same time interval and order quantity, and the basic price processes of assets are generated by an N-dimensional independent standard Brownian motion. The permanent impact generated by an asset in the portfolio during the liquidation will affect all assets, and the temporary impact generated by one asset will only affect itself. On this basis, we establish a liquidation cost model based on the VaR measurement and obtain an optimal liquidation time under discrete-time conditions. The optimal solution shows that the liquidation time is only related to the temporary impact rather than the permanent impact. In the simulation analysis, we give the relationship between volatility parameters, temporary price impact and the optimal liquidation strategy.

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  • Qixuan Luo & Yu Shi & Handong Li, 2021. "Research on Portfolio Liquidation Strategy under Discrete Times," Papers 2103.15400, arXiv.org.
    • Handle: RePEc:arx:papers:2103.15400
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    References listed on IDEAS

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    1. Alexander Schied & Torsten Schöneborn, 2009. "Risk aversion and the dynamics of optimal liquidation strategies in illiquid markets," Finance and Stochastics, Springer, vol. 13(2), pages 181-204, April.
    2. Obizhaeva, Anna A. & Wang, Jiang, 2013. "Optimal trading strategy and supply/demand dynamics," Journal of Financial Markets, Elsevier, vol. 16(1), pages 1-32.
    3. Nicolae Gârleanu & Lasse Heje Pedersen, 2013. "Dynamic Trading with Predictable Returns and Transaction Costs," Journal of Finance, American Finance Association, vol. 68(6), pages 2309-2340, December.
    4. Bertsimas, Dimitris & Lo, Andrew W., 1998. "Optimal control of execution costs," Journal of Financial Markets, Elsevier, vol. 1(1), pages 1-50, April.
    5. Umut Çetin & Robert A. Jarrow & Philip Protter, 2008. "Liquidity risk and arbitrage pricing theory," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 8, pages 153-183, World Scientific Publishing Co. Pte. Ltd..
    6. Gârleanu, Nicolae & Pedersen, Lasse Heje, 2016. "Dynamic portfolio choice with frictions," Journal of Economic Theory, Elsevier, vol. 165(C), pages 487-516.
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    Cited by:

    1. Qixuan Luo & Shijia Song & Handong Li, 2023. "Research on the Effects of Liquidation Strategies in the Multi-asset Artificial Market," Computational Economics, Springer;Society for Computational Economics, vol. 62(4), pages 1721-1750, December.

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