Optimal Portfolio Liquidation for CARA Investors
AbstractWe 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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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 5075.
Date of creation: 27 Sep 2007
Date of revision:
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)
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-10-06 (All new papers)
- NEP-DGE-2007-10-06 (Dynamic General Equilibrium)
- NEP-FMK-2007-10-06 (Financial Markets)
- NEP-UPT-2007-10-06 (Utility Models & Prospect Theory)
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