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Optimal Trading with General Signals and Liquidation in Target Zone Models

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  • Christoph Belak
  • Johannes Muhle-Karbe
  • Kevin Ou

Abstract

We study optimal trading in an Almgren-Chriss model with running and terminal inventory costs and general predictive signals about price changes. As a special case, this allows to treat optimal liquidation in "target zone models": asset prices with a reflecting boundary enforced by regulatory interventions. In this case, the optimal liquidation rate is the "theta" of a lookback option, leading to explicit formulas for Bachelier or Black-Scholes dynamics.

Suggested Citation

  • Christoph Belak & Johannes Muhle-Karbe & Kevin Ou, 2018. "Optimal Trading with General Signals and Liquidation in Target Zone Models," Papers 1808.00515, arXiv.org.
    • Handle: RePEc:arx:papers:1808.00515
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    References listed on IDEAS

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    Cited by:

    1. Peter Bank & 'Alvaro Cartea & Laura Korber, 2023. "Optimal execution and speculation with trade signals," Papers 2306.00621, arXiv.org, revised Jul 2023.
    2. Claudio Bellani & Damiano Brigo, 2021. "Mechanics of good trade execution in the framework of linear temporary market impact," Quantitative Finance, Taylor & Francis Journals, vol. 21(1), pages 143-163, January.
    3. Elliott, Robert & Qiu, Jinniao & Wei, Wenning, 2022. "Neumann problem for backward SPDEs with singular terminal conditions and application in constrained stochastic control under target zone," Stochastic Processes and their Applications, Elsevier, vol. 148(C), pages 68-97.
    4. Philippe Bergault & Fayc{c}al Drissi & Olivier Gu'eant, 2021. "Multi-asset optimal execution and statistical arbitrage strategies under Ornstein-Uhlenbeck dynamics," Papers 2103.13773, arXiv.org, revised Mar 2022.
    5. 'Alvaro Cartea & Fayc{c}al Drissi & Marcello Monga, 2023. "Decentralised Finance and Automated Market Making: Execution and Speculation," Papers 2307.03499, arXiv.org.

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