Open Access
2007 Selling a large stock position: a stochastic control approach with state constraints
M. Pemy, Q. Zhang, G. Yin
Commun. Inf. Syst. 7(1): 93-110 (2007).


A common practice for stock-selling decision making is often concerned with liquidation of the security in a short duration. This is feasible when a relative smaller number of shares of a stock is treated. Selling a large position during a short period of time in the market frequently depresses the market, resulting in poor filling prices. In this work, liquidation strategies are considered for selling much smaller number of shares over a longer period of time. By using a fluid model in which the number of shares are treated as fluid, and the corresponding liquidation is dictated by the rate of selling over time. Our objective is to maximize the expected overall return. The problem is formulated as a stochastic control problem with state constraints. Using the method of constrained viscosity solutions, we characterize the dynamics governing the value function and the associated boundary conditions. Numerical algorithms are also provided along with an illustrative example for demonstration purposes.


Download Citation

M. Pemy. Q. Zhang. G. Yin. "Selling a large stock position: a stochastic control approach with state constraints." Commun. Inf. Syst. 7 (1) 93 - 110, 2007.


Published: 2007
First available in Project Euclid: 20 July 2007

zbMATH: 1140.91406
MathSciNet: MR2346580

Keywords: optimal control , selling rule , state constraint

Rights: Copyright © 2007 International Press of Boston

Vol.7 • No. 1 • 2007
Back to Top