Henderson, Vicky and Hobson, David (David G.). (2010) Optimal liquidation of derivative portfolios. Mathematical Finance, Volume 21 (Number 3). pp. 365-382. ISSN 0960-1627

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Abstract

We consider the problem facing a risk averse agent who seeks to liquidate or exercise a portfolio of (infinitely divisible) perpetual American style options on a single underlying asset. The optimal liquidation strategy is of threshold form and can be characterized explicitly as the solution of a calculus of variations problem. Apart from a possible initial exercise of a tranche of options, the optimal behavior involves liquidating the portfolio in infinitesimal amounts, but at times which are singular with respect to calendar time. We consider a number of illustrative examples involving CRRA and CARA utility, stocks, and portfolios of options with different strikes, and a model where the act of exercising has an impact on the underlying asset price.

Item Type:	Journal Article
Subjects:	H Social Sciences > HG Finance
Divisions:	Faculty of Science > Statistics
Library of Congress Subject Headings (LCSH):	Portfolio management, Liquidation, Derivative securities
Journal or Publication Title:	Mathematical Finance
Publisher:	Wiley-Blackwell Publishing, Inc.
ISSN:	0960-1627
Date:	2010
Volume:	Volume 21
Number:	Number 3
Page Range:	pp. 365-382
Identification Number:	10.1111/j.1467-9965.2010.00455.x
Status:	Peer Reviewed
Publication Status:	Published
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URI:	http://wrap.warwick.ac.uk/id/eprint/41308

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