A sample-path approach to optimal position liquidation

A sample-path approach to optimal position liquidation

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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: ,
Keywords: programming: probabilistic, heuristics
Abstract:

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.

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