A sample-path approach to optimal position liquidation

We consider the problem of optimal position liquidation with the aim of maximizing the expected cash flow stream from the transaction in the presence of temporary or permanent market impact. We use a stochastic programming approach to derive trading strategies that differentiate decisions with respect to observed market conditions. The scenario set consists of a collection of sample paths representing possible future realizations of state variable processes (price of the security, trading volume etc.) At each time moment the set of paths is partitioned into several groups according to specified criteria, and each group is controlled by its own decision variable(s), which allows for adequate representation of uncertainties in market conditions and circumvents anticipativity in the solutions. In contrast to traditional dynamic programming approaches, the presented formulation admits incorporation of different types of constraints in the trading strategy, e.g. risk constraints, various...

• Type: Journal
• Year: 2007
• Where: ANOR
• Authors: Pavlo A. Krokhmal, Stan Uryasev
• Keywords: ANOR 2007, Market Conditions, Market Impact, Permanent Market Impact