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Special Semester on Stochastics with Emphasis on Finance
Linz, September 2008 - December 2008
Presentation: Optimal portfolio liquidation in illiquid markets with finite resiliency

Workshop: Kick-off-Workshop

Time: Fri, September 12, 2008, 10:50-11:40

Speaker: Dirk Becherer

Abstract

When liquidating a large portfolio position, a trader needs to balance two conflicting objectives.
He is impatient to realize the liquidation proceeds soon. But on the other side, to limit market impact costs he should not sell too quickly, since large orders adversely affect the market prices against which they are executed. We present an extension of the Black Scholes model, where an additional resilience factor describes the market impact from previous transactions. We solve the free boundary problem that describes the optimal liquidation strategy explicitly, using classical calculus of variations.

(joint research with Peter Bank from Technische Universitaet Berlin and Quantitative Products Laboratory)

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