HOMEWORK 5

1. Question 1
The agent wishes to liquidate R shares and her objective is to maximize expected
terminal wealth which is denoted by XTv . The value function is
" #
Z T
H(t, x, S, q) = sup Et,x,S,q XTv + QvT (ST − αQvT ) − φ (Qvu )2 du ,
v t

where

dSt = σdWt
dXtv = (St − kvt )vt dt
(a) Derive the corresponding HJB of the value function H(t, S, q, x). and the
optimal liquidation rate in feedback form
(b) What is the terminal condition for H. We propose the ansatz

H(t, S, x, q) = x + qS + h2 (t)q 2 ,
∗
where h(t) is a deterministic function of time. Compute Qvt and vt∗ explic-
itly. [1].

References
[1] Álvaro Cartea, Sebastian Jaimungal, and José Penalva. Algorithmic and high-frequency trad-
ing. Cambridge University Press, 2015.