OPTIMAL LIQUIDATION OF A LARGE BLOCK OF STOCK WITH REGIME SWITCHING

- Journal title : Bulletin of the Korean Mathematical Society
- Volume 48, Issue 4, 2011, pp.737-757
- Publisher : The Korean Mathematical Society
- DOI : 10.4134/BKMS.2011.48.4.737

Title & Authors

OPTIMAL LIQUIDATION OF A LARGE BLOCK OF STOCK WITH REGIME SWITCHING

Shin, Dong-Hoon;

Shin, Dong-Hoon;

Abstract

This work is concerned with an optimal selling rule for a large position of stock in a market. Selling a large block of stock in a short period typically depresses the market, which would result in a poor filling price. In addition, the large selling intensity makes the regime more likely to be poor state in the market. In this paper, regime switching and depressing terms associated with selling intensity are considered on a set of geometric Brownian models to capture movements of underlying asset. We also consider the liquidation strategy to sell much smaller number of shares in a long period. The goal is to maximize the overall return under state constraints. The corresponding value function with the selling strategy is shown to be a unique viscosity solution to the associated HJB equations. Optimal liquidation rules are characterized by a finite difference method. A numerical example is given to illustrate the result.

Keywords

regime switching;optimal selling rule;optimal control;HJB equation;viscosity solution;

Language

English

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