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A sample-path approach to optimal position liquidation

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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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Authors and Affiliations

  1. Department of Mechanical and Industrial Engineering, The University of Iowa, 2403 Seamans Center, Iowa City, IA, 52242, USA

    Pavlo Krokhmal

  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

    Stanislav Uryasev

Authors
  1. Pavlo Krokhmal
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  2. Stanislav Uryasev
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Correspondence to Stanislav Uryasev.

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Krokhmal, P., Uryasev, S. A sample-path approach to optimal position liquidation. Ann Oper Res 152, 193–225 (2007). https://doi.org/10.1007/s10479-006-0143-3

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  • DOI: https://doi.org/10.1007/s10479-006-0143-3

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