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Optimal Liquidation Strategies Regularize Portfolio Selection

Author

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  • 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. Imre Kondor & Fabio Caccioli & G'abor Papp & Matteo Marsili, 2015. "Contour map of estimation error for Expected Shortfall," Papers 1502.06217, arXiv.org.
    2. Istvan Varga-Haszonits & Fabio Caccioli & Imre Kondor, 2016. "Replica approach to mean-variance portfolio optimization," Papers 1606.08679, arXiv.org.
    3. 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.
    4. Caccioli, Fabio & Kondor, Imre & Papp, Gábor, 2015. "Portfolio optimization under expected shortfall: contour maps of estimation error," LSE Research Online Documents on Economics 65096, London School of Economics and Political Science, LSE Library.
    5. Longfeng Zhao & Gang-Jin Wang & Mingang Wang & Weiqi Bao & Wei Li & H. Eugene Stanley, 2017. "Stock market as temporal network," Papers 1712.04863, arXiv.org.
    6. 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.
    7. 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.
    8. Fabio Caccioli & Imre Kondor & Matteo Marsili & Susanne Still, 2014. "$L_p$ regularized portfolio optimization," Papers 1404.4040, arXiv.org.
    9. Imre Kondor, 2014. "Estimation Error of Expected Shortfall," Papers 1402.5534, arXiv.org.
    10. G'abor Papp & Fabio Caccioli & Imre Kondor, 2016. "Fluctuation-bias trade-off in portfolio optimization under Expected Shortfall with $\ell_2$ regularization," Papers 1602.08297, arXiv.org.
    11. 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.

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