Numerical methods for an optimal order execution problem
This paper deals with numerical solutions to an impulse control problem arising from optimal portfolio liquidation with bid-ask spread and market price impact penalizing speedy execution trades. The corresponding dynamic programming (DP) equation is a quasi-variational inequality (QVI) with solvency constraint satisfied by the value function in the sense of constrained viscosity solutions. By taking advantage of the lag variable tracking the time interval between trades, we can provide an explicit backward numerical scheme for the time discretization of the DPQVI. The convergence of this discrete-time scheme is shown by viscosity solutions arguments. An optimal quantization method is used for computing the (conditional) expectations arising in this scheme. Numerical results are presented by examining the behaviour of optimal liquidation strategies, and comparative performance analysis with respect to some benchmark execution strategies. We also illustrate our optimal liquidation algorithm on real data, and observe various interesting patterns of order execution strategies. Finally, we provide some numerical tests of sensitivity with respect to the bid/ask spread and market impact parameters.
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- Vathana Ly Vath & Mohamed Mnif & Huyên Pham, 2007. "A model of optimal portfolio selection under liquidity risk and price impact," Finance and Stochastics, Springer, vol. 11(1), pages 51-90, January.
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