Optimal Portfolio Liquidation with Limit Orders
Guéant, Olivier; Lehalle, Charles-Albert; Tapia, Joaquin Fernandez (2011), Optimal Portfolio Liquidation with Limit Orders. https://basepub.dauphine.fr/handle/123456789/7391
TypeDocument de travail / Working paper
Series titleCahiers de la Chaire Finance et Développement Durable
MetadataShow full item record
Abstract (EN)This paper addresses the optimal scheduling of the liquidation of a portfolio using a new angle. Instead of focusing only on the scheduling aspect like Almgren and Chriss in [ 2 ], or only on the liquidity-consuming orders like Obizhaeva and Wang in [ 31 ], we link the optimal trade-schedule to the price of the limit orders that have to be sent to the limit order book to optimally liquidate a portfolio. Most practitioners address these two issues separately: they compute an optimal trading curve and they then send orders to the markets to try to follow it. The results obtained here solve simultaneously the two problems. As in a previous paper that solved the “intra-day market making problem” [ 19], the interactions of limit orders with the market are modeled via a Poisson process pegged to a diffusive “fair price” and a Hamilton-Jacobi-Bellman equation is used to solve the trade-oﬀ between execution risk and price risk. Backtests are finally carried out to exemplify the use of our results.
Subjects / Keywordsliquidation; Portfolio
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Guéant, Olivier; Lehalle, Charles-Albert; Tapia, Joaquin Fernandez (2011) Document de travail / Working paper
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