How Quickly Should You Liquidate Your Vested Stock?

Authors

  • Robert Dubil Finance Department, University of Connecticut

DOI:

https://doi.org/10.61190/fsr.v11i1.4722

Keywords:

Liquidity, Value at risk, Trading strategy, Market impact

Abstract

I model the optimal behavior of an individual or trustee who decides to liquidate a position in an asset. As his holdings are large, his own sales may have adverse permanent and temporary impact on the realized return. To minimize this effect, a wealthy insider may choose to liquidate slowly. At the optimum, he balances the exposure to the return variance against sale-induced price concessions by using a Value-at-Risk-inspired risk-reward function as his decision tool. The prescriptive appeal of the model is demonstrated numerically. For example, I show that a risk-averse individual holding $1 million of his wealth in a stock, subject to 50% volatility and linear temporary impact of $1,900, should optimally take 10 days to liquidate.

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Published

2002-03-31

How to Cite

Dubil, R. (2002). How Quickly Should You Liquidate Your Vested Stock?. Financial Services Review, 11(1), 65–84. https://doi.org/10.61190/fsr.v11i1.4722

Issue

Vol. 11 No. 1 (2002): FSR Spring 2002

Section

New Original Submission

License

Copyright (c) 2002 Academy of Financial Services

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