Optimal execution with multiplicative price impact and incomplete information on the return / Felix Dammann and Giorgio Ferrari
VerfasserDammann, Felix ; Ferrari, Giorgio
ErschienenBielefeld, Germany : Center for Mathematical Economics (IMW), Bielefeld University, February 2022
Elektronische Ressource
Umfang1 Online-Ressource (37 Seiten)
SerieCenter for Mathematical Economics Working papers ; 663
SchlagwörterImmaterielles Wirtschaftsgut / Wert / Mathematisches Modell / Stochastik
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Optimal execution with multiplicative price impact and incomplete information on the return [0.8 mb]

We study an optimal liquidation problem with multiplicative price impact in which the trend of the assets price is an unobservable Bernoulli random variable. The investor aims at selling over an infinite time-horizon a fixed amount of assets in order to maximize a net expected profit functional, and lump-sum as well as singularly continuous actions are allowed. Our mathematical modelling leads to a singular stochastic control problem featuring a finite-fuel constraint and partial observation. We provide the complete analysis of an equivalent three-dimensional degenerate problem under full information, whose state process is composed of the assets price dynamics, the amount of available assets in the portfolio, and the investors belief about the true value of the assets trend. The optimal execution rule and the problems value function are expressed in terms of the solution to a truly two-dimensional optimal stopping problem, whose associated belief-dependent free boundary b triggers the investors optimal selling rule. The curve b is uniquely determined through a nonlinear integral equation, for which we derive a numerical solution allowing to understand the sensitivity of the problems solution with respect to the relevant models parameters.

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