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Full-Text Articles in Finance and Financial Management
Optimal Liquidation Strategies And Their Implications, Christopher Ting, Mitch Warachka, Yonggan Zhao
Optimal Liquidation Strategies And Their Implications, Christopher Ting, Mitch Warachka, Yonggan Zhao
Business Faculty Articles and Research
This paper studies optimal liquidation when the selling price depends on the rate of liquidation, transaction time, volume, and the asset's intrinsic value. A generic closed-form solution for maximizing the discounted liquidation proceeds is derived. To obtain financial insights, three parametric specifications that proxy for increasingly realistic market conditions are examined. In our framework, maximizing liquidation proceeds and minimizing liquidity costs are equivalent. The optimal strategies imply more rapid liquidations in less liquid markets. We also show that volatility is stochastic when market liquidity is unpredictable.
Pricing Options In An Extended Black Scholes Economy With Illiquidity: Theory And Empirical Evidence, U. Çetin, Robert Jarrow, P. Protter, Mitch Warachka
Pricing Options In An Extended Black Scholes Economy With Illiquidity: Theory And Empirical Evidence, U. Çetin, Robert Jarrow, P. Protter, Mitch Warachka
Business Faculty Articles and Research
This article studies the pricing of options in an extended Black Scholes economy in which the underlying asset is not perfectly liquid. The resulting liquidity risk is modeled as a stochastic supply curve, with the transaction price being a function of the trade size. Consistent with the market microstructure literature, the supply curve is upward sloping with purchases executed at higher prices and sales at lower prices. Optimal discrete time hedging strategies are then derived. Empirical evidence reveals a significant liquidity cost intrinsic to every option.
Outsourcing Central Banking: Lessons From Estonia, Sarkis Joseph Khoury, Clas Wihlborg
Outsourcing Central Banking: Lessons From Estonia, Sarkis Joseph Khoury, Clas Wihlborg
Business Faculty Articles and Research
An orthodox currency board (CB) renders central banking redundant for interest and exchange rate determination. Thereby, monetary policy is de facto outsourced. Foreign direct investment (FDI) in banking can lead to outsourcing of the second important central bank function, responsibility for banking supervision. Economic and political conditions for outsourcing of central banking are discussed. Estonia's experience with a CB and expanding foreign involvement in banking is reviewed. The Argentine CB experience is discussed briefly to provide a contrast. The conclusion outlines the conditions for successful currency outsourcing to another country or regional authority.