Optimal liquidation strategies

Liquidation strategies consider the problem of minimising transaction costs occurring in a portfolio liquidation. Transaction costs are the difference between current market value and the realised value after the liquidation. A strategy to follow to perform a liquidation is especially important to institutional investors due the large size of their trades. Large trades can have a significant effect on the price of a security which can impact the realised returns of the liquidation. These models solve for trading trajectories that maximise this. The models investigated do this in a mean-variance framework where the expected return of the strategy is constrained by its variance and the investors risk preference. Parameters used in liquidity functions are estimated for securities on the South African JSE Securities Exchange. The effects of security liquidity, volatility, stock correlation and length of liquidation horizon on the optimal strategy are investigated. There is little or no existing literature that attempts to model these functions in the South African market. Due to the smaller size of the South African market as well as the number of thinly traded shares compared to most markets studied in the literature, many securities are highly illiquid. We investigate relationships between firm size and daily traded value and these liquidity parameters. General rules are presented to help traders improve a liquidation strategy without the need to estimate all parameters needed to calculate an optimal strategy using one of these models.

Grantor dc:publisher.institution

Department of Mathematics and Applied Mathematics

Year dc:date.issued

2006

Author dc:creator

• Ennis, Michael

Advisors dc:contributor.advisor

• Maritz, EJ
• Guo, Renkuan

Language dc:language.iso

eng

Handle dc:identifier.uri

http://hdl.handle.net/11427/8119

OAI identifier oai:identifier

oai:open.uct.ac.za:11427/8119