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Optimal Liquidation with Signals: the General Propagator Case

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  • Eduardo Abi Jaber

    (CMAP - Centre de Mathématiques Appliquées de l'Ecole polytechnique - Inria - Institut National de Recherche en Informatique et en Automatique - X - École polytechnique - IP Paris - Institut Polytechnique de Paris - CNRS - Centre National de la Recherche Scientifique)

  • Eyal Neuman

    (Imperial College London)

Abstract

We consider a class of optimal liquidation problems where the agent's transactions create transient price impact driven by a Volterra-type propagator along with temporary price impact. We formulate these problems as minimization of a revenue-risk functionals, where the agent also exploits available information on a progressively measurable price predicting signal. By using an infinite dimensional stochastic control approach, we characterize the value function in terms of a solution to a free-boundary $L^2$-valued backward stochastic differential equation and an operator-valued Riccati equation. We then derive analytic solutions to these equations which yields an explicit expression for the optimal trading strategy. We show that our formulas can be implemented in a straightforward and efficient way for a large class of price impact kernels with possible singularities such as the power-law kernel.

Suggested Citation

  • Eduardo Abi Jaber & Eyal Neuman, 2025. "Optimal Liquidation with Signals: the General Propagator Case," Post-Print hal-03835948, HAL.
  • Handle: RePEc:hal:journl:hal-03835948
    Note: View the original document on HAL open archive server: https://hal.science/hal-03835948v2
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