Optimal portfolio liquidation with additional information
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We consider the problem of how to optimally close a large asset position in a market with a linear temporary price impact. We take the perspective of an agent who obtains a signal about the future price evolvement. By means of classical stochastic control we derive explicit formulas for the closing strategy that minimizes the expected execution costs. We compare agents observing the signal with agents who do not see it. We compute explicitly the expected additional gain due to the signal, and perform a comparative statics analysis.
KeywordsOptimal liquidation Price impact Additional information Enlargement of filtration HJB equation
The authors thank anonymous referees for very useful comments. The first author gratefully acknowledges the financial support by the Ecole Centrale de Lyon during his visit in March 2012.
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