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arxiv: 1212.3145 · v2 · pith:FACRH36C · submitted 2012-12-13 · q-fin.PM

Optimal Liquidation in a Finite Time Regime Switching Model with Permanent and Temporary Pricing Impact

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classification q-fin.PM
keywords finiteimpactliquidationoptimalregimetimemodelpermanent
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In this paper we discuss the optimal liquidation over a finite time horizon until the exit time. The drift and diffusion terms of the asset price are general functions depending on all variables including control and market regime. There is also a local nonlinear transaction cost associated to the liquidation. The model deals with both the permanent impact and the temporary impact in a regime switching framework. The problem can be solved with the dynamic programming principle. The optimal value function is the unique continuous viscosity solution to the HJB equation and can be computed with the finite difference method.

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