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Portfolio Liquidation under Factor Uncertainty

Author

Listed:
  • Horst, Ulrich

    (HU Berlin)

  • Xia, Xiaonyu

    (HU Berlin)

  • Zhou, Chao

    (National University of Singapore)

Abstract

We study an optimal liquidation problem under the ambiguity with respect to price impact parameters. Our main results show that the value function and the optimal trading strategy can be characterized by the solution to a semi-linear PDE with superlinear gradient, monotone generator and singular terminal value. We also establish an asymptotic analysis of the robust model for small amounts of uncertainty and analyze the effect of robustness on optimal trading strategies and liquidation costs. In particular, in our model ambiguity aversion is observationally equivalent to increased risk aversion. This suggests that ambiguity aversion increases liquidation rates.

Suggested Citation

  • Horst, Ulrich & Xia, Xiaonyu & Zhou, Chao, 2021. "Portfolio Liquidation under Factor Uncertainty," Rationality and Competition Discussion Paper Series 274, CRC TRR 190 Rationality and Competition.
    • Handle: RePEc:rco:dpaper:274
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    References listed on IDEAS

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    Cited by:

    1. Ulrich Horst & Evgueni Kivman, 2021. "Optimal trade execution under small market impact and portfolio liquidation with semimartingale strategies," Papers 2103.05957, arXiv.org, revised Jul 2023.

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    More about this item

    Keywords

    stochastic control; uncertainty; portfolio liquidation; singular terminal value; superlinear growth gradient;
    All these keywords.

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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