A sample-path approach to optimal position liquidation |
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Authors: | Pavlo Krokhmal Stanislav Uryasev |
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Institution: | (1) Department of Mechanical and Industrial Engineering, The University of Iowa, 2403 Seamans Center, Iowa City, IA 52242, USA;(2) Risk Management and Financial Engineering Lab, Department of Industrial and Systems Engineering, University of Florida, P. O. Box 116595, Gainesville, FL 32611-6595, USA |
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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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Keywords: | Optimal trading Market impact Stochastic programming Sample paths |
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