Abstract
Liquidity risks arise from the presence of time lags on execution of market orders in trading securities and ''quantity'' effect (liquidation discount) on security price. In this paper, we consider an investor who is holding a portfolio of stock and cash (in the form of market money account) with the objective to unwind his position on the risky asset so that the expected value of cash at the end of a fixed time horizon is maximized. Assuming that the executive time lags and liquidation discount are deterministic, we construct the numerical algorithms for computing the optimal trading strategy that maximizes the expected terminal value of cash position in the portfolio. We also investigate the probability of meeting the target cash level under different liquidation discount functions.
Highlights
Liquidity risks are related to the time delay and price effect of execution of sell or buy market orders of an asset in the financial market
The “quantity” effect on the asset price is characterized by the liquidation discount, which refers to the difference between the market value of the asset and its value when liquidated
10 per day deterministic execution time lags and liquidation discount, we present a numerical algorithm for computing the optimal liquidation strategy which maximizes the expected terminal value of cash position in a trading portfolio
Summary
Liquidity risks are related to the time delay and price effect of execution of sell or buy market orders of an asset in the financial market. There is a price discrepancy between the price of security at the time when a large trade order is placed and at the time when the trade order is executed. The difference in these prices is called the liquidation discount. Assuming that the execution time lags and liquidation discount are deterministic, the optimal liquidation problem is to develop an optimal execution strategy such that a trader can unwind a portfolio position within a fixed time constraint subject to the optimization of certain criteria, like the minimization of the expected shortfall in value
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callMore From: Journal of Industrial & Management Optimization
Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
