Speaker: Robert F. Almgren
Title: Modeling Liquidity Risk.
Affiliation: University of Chicago.
Date: Friday, February 25.
Place and Time: Dirac Library, 4th floor, 4:30-5:30 pm.
Refreshments: 4:00 pm.

Abstract. In carrying out a large portfolio transaction, a trader must balance the liquidity premium he must pay to trade rapidly, against the uncertainty of future prices to which he is exposed by trading slowly. Using a simple model for how trading moves prices, and using a simple utility function formulation for balancing risk against known costs, we apply the calculus of variations to determine an optimal trading strategy in terms of a few market parameters. We argue that these solutions are a realistic mathematical formulation of traders' intuition about optimal trading. We examine actual US stock market data to estimate the parameters in our model, and show that the time scales characterizing optimal liquidation strategies vary by several orders of magnitude across the market. Copies of the working paper are available on our Web page http://finmath.uchicago.edu/~almgren/optliq/