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Optimal Liquidation Strategies in Illiquid Markets

Author

Listed:
  • Eric JONDEAU

    (Swiss Finance Institute and University of Lausanne)

  • Augusto PERILLA

    (RMF Investment Management)

  • Michael ROCKINGER

    (Swiss Finance Institute, University of Lausanne and CEPR)

Abstract

In this paper, we consider block trading strategies and characterize the times when a block trade is a popular choice. We also study the economic relevance of optimal liquidation strategies by calibrating a recent and realistic microstructure model with data from the Paris Stock Exchange. We distinguish between two cases: one in which the parameters are constant throughout the day and one in which they vary over time. We present and solve an optimization problem incorporating this realistic microstructure model. Our model endogenizes the trading periods required before a position is liquidated. A comparative static exercise demonstrates the realism of our model. We also examine the model for bearish and bullish beliefs, demonstrating that volatility plays a role in determining the speed of trade execution.

Suggested Citation

  • Eric JONDEAU & Augusto PERILLA & Michael ROCKINGER, 2009. "Optimal Liquidation Strategies in Illiquid Markets," Swiss Finance Institute Research Paper Series 09-24, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp0924
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    File URL: http://ssrn.com/abstract=1431869
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    More about this item

    Keywords

    Optimal trading strategy; liquidity risk; price impact; high frequency data; microstructure;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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