Research on Portfolio Liquidation Strategy under Discrete Times

TL;DR

This paper develops an optimal discrete-time portfolio liquidation strategy considering asset impacts, showing that liquidation timing depends mainly on temporary impacts, with simulations illustrating effects of volatility and impact parameters.

Contribution

It introduces a novel discrete-time liquidation model incorporating both permanent and temporary impacts, identifying that optimal timing depends solely on temporary impacts.

Findings

Optimal liquidation time is influenced only by temporary impact.

Higher volatility affects the optimal strategy.

Simulation results clarify impact of parameters on liquidation strategy.

Abstract

This paper presents an optimal strategy for portfolio liquidation under discrete time conditions. We assume that N risky assets held will be liquidated according to the same time interval and order quantity, and the basic price processes of assets are generated by an N-dimensional independent standard Brownian motion. The permanent impact generated by an asset in the portfolio during the liquidation will affect all assets, and the temporary impact generated by one asset will only affect itself. On this basis, we establish a liquidation cost model based on the VaR measurement and obtain an optimal liquidation time under discrete-time conditions. The optimal solution shows that the liquidation time is only related to the temporary impact rather than the permanent impact. In the simulation analysis, we give the relationship between volatility parameters, temporary price impact and the optimal liquidation strategy.