Publication Type

Journal Article

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

Copyright Owner and License

Authors

Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.

Additional URL

http://doi.org/10.1016/j.jedc.2006.07.003

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