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Optimal Portfolio Liquidation for CARA Investors

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Author Info
Schied, Alexander
Schöneborn, Torsten

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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.

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File URL: http://mpra.ub.uni-muenchen.de/5075/
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 5075.

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Date of creation: 27 Sep 2007
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Handle: RePEc:pra:mprapa:5075

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Related research
Keywords: Liquidity illiquid markets optimal liquidation strategies dynamic trading strategies algorithmic trading utility maximization

Find related papers by JEL classification:
G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
G20 - Financial Economics - - Financial Institutions and Services - - - General
G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Bruce Ian Carlin & Miguel Sousa Lobo & S. Viswanathan, 2007. "Episodic Liquidity Crises: Cooperative and Predatory Trading," Journal of Finance, American Finance Association, vol. 62(5), pages 2235-2274, October. [Downloadable!] (restricted)
  2. Markus K. Brunnermeier & Lasse Heje Pedersen, 2005. "Predatory Trading," Journal of Finance, American Finance Association, vol. 60(4), pages 1825-1863, 08. [Downloadable!] (restricted)
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  3. Bertsimas, Dimitris & Lo, Andrew W., 1998. "Optimal control of execution costs," Journal of Financial Markets, Elsevier, vol. 1(1), pages 1-50, April. [Downloadable!] (restricted)
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  1. Schied, Alexander & Schoeneborn, Torsten, 2008. "Risk aversion and the dynamics of optimal liquidation strategies in illiquid markets," MPRA Paper 7105, University Library of Munich, Germany. [Downloadable!]
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