Optimal Portfolio Liquidation and Dynamic Mean-variance Criterion

TL;DR

This paper develops explicit, time-consistent optimal trading strategies for portfolio liquidation under a dynamic mean-variance framework, incorporating stochastic factors like liquidity and volatility, with solutions supported by empirical data.

Contribution

It introduces explicit, time-consistent strategies for portfolio liquidation under dynamic mean-variance criteria, including models with stochastic liquidity and volatility, extending prior work.

Findings

Explicit strategies in basic models

Solutions incorporating stochastic volatility

Empirical validation of the models

Abstract

In this paper, we consider the optimal portfolio liquidation problem under the dynamic mean-variance criterion and derive time-consistent solutions in three important models. We give adapted optimal strategies under a reconsidered mean-variance subject at any point in time. We get explicit trading strategies in the basic model and when random pricing signals are incorporated. When we consider stochastic liquidity and volatility, we construct a generalized HJB equation under general assumptions for the parameters. We obtain an explicit solution in stochastic volatility model with a given structure supported by empirical studies.