How Quickly Should You Liquidate Your Vested Stock?
DOI:
https://doi.org/10.61190/fsr.v11i1.4722Keywords:
Liquidity, Value at risk, Trading strategy, Market impactAbstract
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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