Research On The Optimal Liquidation Strategy Of Institutions In Chinese Stock Market

One of the important hypothesizes of traditional financial theory is that there is no friction in market, which means any investment behavior has no influence on the current market price, and any deal of different directions and scales can be done immediately. However, market is incomplete, and demand is not equal to supply in every time. Thus, suppose the market condition is stable, the price from the transaction system does not equal to the buying or selling price next time. At the current price level, the assets, which traders do not liquidate in time, are located at a nominal value. Traders not only need to pay the fixed cost used to liquidated, commission and stamp duty, but also to pay the liquidate cost generated by changed price caused by the block trade. Thus, investors cannot make a deal according to their expected price because of the price impact influenced by the block trade. It is the main contents we studied in this paper that the endogenous liquidate cost and risk caused by the institutional investors'block trade.There are three parts in the paper. Chapter 1 is the first part, which is to introduce the research background and significance, and review the theory foundation, then introduce the current research condition in this field.The second part includes the second, third, fourth, and fifth chapter. Chapter 2 introduces the transaction of block trade and price impact. The paper used abnormal yield of fore-and-aft deal of block trade to discuss the impact recovery condition of block trade under the Chinese market. Then, the paper uses the factors of price impact to finish the regression analysis, and mainly discuss the factors of direction. Furthermore, micro-structural model will be made through the price impact of amount of transaction to get the coefficient of stock permanent impact and instantaneous impact, which provides for the foundation of execution strategy and endogenous liquidity risk management. Chapter 3 discusses the optimal execution strategy under of framework of capital restriction and no capital restriction. Through the model of balancing market cost of impact and risk of price fluctuating, the paper gains liquidation strategy under the VaR framework during the period of liquidation. The optimal execution strategy is the function of positions, trade interval, market impact coefficient, and volatility. Chapter 4 discusses the liquid risk management under the optimal execution strategy, which introduced the price impact to the VaR model. The model is aimed at minimum execution cost to find optimal execution strategy, and then to gain the liquid risk adjusted VaR based on this optimal execution strategy. The VaR is determined by the instant price impact, positions, market liquidity, and confidence level. Chapter 5 supplies the research to the application, and put the optimal execution strategy into the arbitrage of ETF.The third part is the last chapter. Based on the analysis above, this chapter summarizes the paper, and proposes the further research field.