Optimal liquidation strategies and their implications

Optimal liquidation strategies and their implications

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 parametr...

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Bibliographic Details
Main Authors: TING, Christopher, WARACHKA, Mitch, ZHAO, Yonggan
Format: text
Language:English
Published: Institutional Knowledge at Singapore Management University 2007
Subjects:
Stochastic control
Trading strategy
Liquidity risk
Transaction costs
Stochastic volatility
Finance and Financial Management
Portfolio and Security Analysis
Online Access:https://ink.library.smu.edu.sg/lkcsb_research/2697
https://ink.library.smu.edu.sg/context/lkcsb_research/article/3696/viewcontent/OptimalLiquidationStrategiesImplications_2007.pdf
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Institution: Singapore Management University
Language: English
Description
Summary: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.

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