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arXiv · 1808.00515

Optimal Trading with General Signals and Liquidation in Target Zone Models

Christoph Belak·Johannes Muhle-Karbe·Kevin Ou
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Abstract

We study optimal trading in an Almgren-Chriss model with running and terminal inventory costs and general predictive signals about price changes. As a special case, this allows to treat optimal liquidation in "target zone models": asset prices with a reflecting boundary enforced by regulatory interventions. In this case, the optimal liquidation rate is the "theta" of a lookback option, leading to explicit formulas for Bachelier or Black-Scholes dynamics.

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Christoph Belak, Johannes Muhle-Karbe, Kevin Ou. 2018-08-01. Optimal Trading with General Signals and Liquidation in Target Zone Models. https://arxiv.org/abs/1808.00515

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