Publication Type
Journal Article
Version
acceptedVersion
Publication Date
4-2007
Abstract
This paper studies optimal liquidation when the selling price depends on the rate of liquidation, transaction time, volume, and the asset's intrinsic value. A generic closed-form solution for maximizing the discounted liquidation proceeds is derived. To obtain financial insights, three parametric specifications that proxy for increasingly realistic market conditions are examined. In our framework, maximizing liquidation proceeds and minimizing liquidity costs are equivalent. The optimal strategies imply more rapid liquidations in less liquid markets. We also show that volatility is stochastic when market liquidity is unpredictable.
Keywords
Stochastic control, Trading strategy, Liquidity risk, Transaction costs, Stochastic volatility
Discipline
Finance and Financial Management | Portfolio and Security Analysis
Research Areas
Finance; Quantitative Finance
Publication
Journal of Economics Dynamics and Control
Volume
31
Issue
4
First Page
1431
Last Page
1450
ISSN
0165-1889
Identifier
10.1016/j.jedc.2006.07.003
Publisher
Elsevier
Citation
TING, Christopher; WARACHKA, Mitch; and ZHAO, Yonggan.
Optimal liquidation strategies and their implications. (2007). Journal of Economics Dynamics and Control. 31, (4), 1431-1450.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/2697
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.1016/j.jedc.2006.07.003