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Optimal liquidation of derivative portfolios
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Henderson, Vicky and Hobson, David (David G.) (2010) Optimal liquidation of derivative portfolios. Mathematical Finance, Volume 21 (Number 3). pp. 365-382. doi:10.1111/j.1467-9965.2010.00455.x ISSN 0960-1627.
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Official URL: http://dx.doi.org/10.1111/j.1467-9965.2010.00455.x
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 | ||||
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Subjects: | H Social Sciences > HG Finance | ||||
Divisions: | Faculty of Science, Engineering and Medicine > 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 | ||||
Official Date: | 2010 | ||||
Dates: |
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Volume: | Volume 21 | ||||
Number: | Number 3 | ||||
Page Range: | pp. 365-382 | ||||
DOI: | 10.1111/j.1467-9965.2010.00455.x | ||||
Status: | Peer Reviewed | ||||
Publication Status: | Published |
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