General Intensity Shapes in Optimal Liquidation

Economy – Quantitative Finance – Trading and Market Microstructure

Scientific paper

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Scientific paper

We study the optimal liquidation problem using limit orders. Albeit the seminal literature on optimal liquidation, rooted to Almgren-Chriss models, tackles the optimal liquidation problem using a trade-off between market impact and price risk, it only answers the general question of the liquidation rhythm. The very question of the actual way to proceed with trading is then rarely dealt with since most classical models use only market orders. Our model, that incorporates both price risk and non-execution risk, answers this question using optimal placement of limit orders. The very general framework we propose about the shape of the intensity generalizes both the risk-neutral model presented in [12] and the model developed in [21], restricted to exponential intensities.

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