Article ID: | iaor20073453 |
Country: | Netherlands |
Volume: | 152 |
Issue: | 1 |
Start Page Number: | 193 |
End Page Number: | 225 |
Publication Date: | Jul 2007 |
Journal: | Annals of Operations Research |
Authors: | Uryasev Stanislav, Krokhmal Pavlo A. |
Keywords: | programming: probabilistic, heuristics |
We consider the problem of optimal position liquidation where the expected cash flow stream due to transactions is maximized in the presence of temporary or permanent market impact. A stochastic programming approach is used to construct trading strategies that differentiate decisions with respect to the observed market conditions, and can accommodate various types of trading constraints. As a scenario model, we use a collection of sample paths representing possible future realizations of state variable processes (price, trading volume, etc.), and employ a heuristical technique of sample-path grouping, which can be viewed as a generalization of the standard nonanticipativity constraints.