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Liquidation in Target Zone Models

    https://doi.org/10.1142/S2382626619500102Cited by:5 (Source: Crossref)
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    Abstract

    We study optimal liquidation in “target zone models” — asset prices with a reflecting boundary enforced by regulatory interventions. This can be treated as a special case of an Almgren–Chriss model with running and terminal inventory costs and general predictive signals about price changes. The optimal liquidation rate in target-zone models can in turn be characterized as the “theta” of a lookback option, leading to explicit formulas for Bachelier or Black–Scholes dynamics.

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