Risk aversion and the dynamics of optimal liquidation strategies in illiquid markets

Finance and Stochastics

Volumn 13, Issue 2, 2009, Pages 181-204

  Schied, Alexander ^a   Schöneborn, Torsten ^b,c  

^a Cornell University   (United States)

^b TECHNISCHE UNIVERSITÄT BERLIN   (Germany)

^c Man Investment Products Ltd   (United Kingdom)

Author keywords

Absolute risk aversion; Aggressive in the money; Hamilton Jacobi Bellman equation; Liquidity risk; Market impact; Nonlinear partial differential equation; Optimal liquidation; Optimal trade execution; Passive in the money; Sensitivity analysis

Indexed keywords

EID: 67349091011     PISSN: 09492984     EISSN: None     Source Type: Journal    
DOI: 10.1007/s00780-008-0082-8     Document Type: Article

References (28)

1. P. Abramowitz 2006 Tool of the trade Inst. Invest. Alpha Mag. 6 41 44
2. Alfonsi, A., Fruth, A., Schied, A.: Optimal execution strategies in limit order books with general shape functions. Working paper (2007). http://people.orie.cornell.edu/~schied
3. R. Almgren 2003 Optimal execution with nonlinear impact functions and trading-enhanced risk Appl. Math. Finance 10 1 18 (Pubitemid 37513062)
4. R. Almgren N. Chriss 1999 Value under liquidation Risk 12 61 63
5. R. Almgren N. Chriss 2001 Optimal execution of portfolio transactions J. Risk 3 5 39
6. Almgren, R., Lorenz, J.: Adaptive arrival price. In: Algorithmic Trading III: Precision, Control, Execution, Institutional Investors Guides (2007)
7. D. Bertsimas A. Lo 1998 Optimal control of execution costs J. Financ. Mark. 1 1 50 (Pubitemid 128338713)
8. J.-P. Bouchaud Y. Gefen M. Potters M. Wyart 2004 Fluctuations and response in financial markets: The subtle nature of 'random' price changes Quant. Finance 4 176 190 (Pubitemid 38613527)
9. B.I. Carlin M.S. Lobo S. Viswanathan 2007 Episodic liquidity crises: cooperative and predatory trading J. Finance 65 2235 2274
10. U. Çetin L.C.G. Rogers 2007 Modelling liquidity effects in discrete time Math. Finance 17 15 29
11. D. Easley M. O'Hara 1987 Price, trade size, and information in securities markets J. Financ. Econ. 19 69 90
12. H. He H. Mamaysky 2005 Dynamic trading policies with price impact J. Econ. Dyn. Control 29 891 930 (Pubitemid 40526218)
13. D. Kahneman A. Tversky 1979 Prospect theory: an analysis of decision under risk Econometrica 47 263 291
14. Kissell, R., Glantz, M.: Optimal Trading Strategies: Quantitative Approaches for Managing Market Impact and Trading Risk. McGraw-Hill, New York (2003)
15. Kissell, R., Malamut, R.: Understanding the profit and loss distribution of trading algorithms. In: Algorithmic Trading: Precision, Control, Execution, Institutional Investors Guides (2005)
16. R. Kissell R. Malamut 2006 Algorithmic decision making framework J. Trading 1 12 21
17. A.S. Kyle 1985 Continuous auctions and insider trading Econometrica 53 1315 1336
18. Ladyzhenskaya, O.A., Solonnikov, V.A., Ural'ceva, N.N.: Linear and Quasi-linear Equations of Parabolic Type. Translations of Mathematical Monographs, vol. 23. American Mathematical Society, Providence (1968)
19. D. Leinweber 2007 Algo vs. algo Inst. Invest. Alpha Mag. 2 44 51
20. Obizhaeva, A., Wang, J.: Optimal trading strategy and supply/demand dynamics. J. Financ. Marh. (2006, forthcoming). http://www.rhsmith.umd.edu/ faculty/obizhaeva
21. M. Potters J.-P. Bouchaud 2003 More statistical properties of order books and price impact Physica A 324 133 140
22. Rogers, L.C.G., Singh, S.: The cost of illiquidity and its effects on hedging. Working paper (2007). http://www.statslab.cam.ac.uk/~chris
23. J. Schack 2004 The orders of battle Instit. Invest. 11 77 84
24. Schied, A., Schöneborn, T.: Optimal basket liquidation with finite time horizon for CARA investors. Working paper (2008). http://people.orie. cornell.edu/~schied
25. Schöneborn, T., Schied, A.: Liquidation in the face of adversity: stealth vs. sunshine trading. Working paper (2008). http://people.orie.cornell. edu/~schied
26. Simmonds, M.: The use of quantitative models in execution analytics and algorithmic trading, Presentation at the University Finance Seminar, Judge Business School, Cambridge University (2007). http://www-cfr.jbs.cam.ac.uk/ seminar/SimmondsPresentation.pdf
27. A. Subramanian R.A. Jarrow 2001 The liquidity discount Math. Finance 11 447 474 (Pubitemid 33580323)
28. P. Weber B. Rosenow 2005 Order book approach to price impact Quant. Finance 5 357 364 (Pubitemid 41441181)