A Singular Differential Equation Stemming from an Optimal Control Problem in Financial Economics

We consider the ordinary differential equation $$x^2 u''=axu'+bu-c bigl(u'-1bigr)^2, quad xin(0,x_0), $$ with $ainmathbb{R}, binmathbb{R}$ , c>0 and the singular initial condition u(0)=0, which in financial economics describes optimal disposal of an asset in a market with liquidity effects. It is shown in the paper that if a+b<0 then no continuous solutions exist, whereas if a+b>0 then there are infinitely many continuous solutions with indistinguishable asymptotics near 0. Moreover, it is proved that in the latter case there is precisely one solution u corresponding to the choice x ₀=∞ which is such that 0≤u(x)≤x for all x>0, and that this solution is strictly increasing and concave.