Optimal Liquidation under Stochastic Resilience of Price Impact
Dirk Becherer, Todor Bilarev, Peter Frentrup · arXiv (Cornell University) · 2016
We solve explicitly a two-dimensional singular control problem of finite fuel type in infinite time horizon. The problem stems from the optimal liquidation of an asset position in a financial market with multiplicative price impact with stochastic resilience. The optimal control is obtained as a diffusion process reflected at a non-constant free boundary. To solve the variational inequality and prove optimality, we show new results of independent interest on constructive approximations and Laplace transforms of the inverse local times for diffusions reflected at elastic boundaries.