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.
Stochastic control, Trading strategy, Liquidity risk, Transaction costs, Stochastic volatility
Finance and Financial Management | Portfolio and Security Analysis
Finance; Quantitative Finance
Journal of Economics Dynamics and Control
TING, Christopher; WARACHKA, Mitch; and ZHAO, Yonggan.
Optimal liquidation strategies and their implications. (2007). Journal of Economics Dynamics and Control. 31, (4), 1431-1450. Research Collection Lee Kong Chian School Of Business.
Available at: http://ink.library.smu.edu.sg/lkcsb_research/2697
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