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Dubil, Robert
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[Journal:] Journal of Entrepreneurial Finance, JEF [ISSN:] 1551-9570 [Volume:] 7 [Year:] 2002 [Issue:] 2 [Pages:] 65-81
We model the optimal liquidation behavior of a venture capital or non-diversified asset management firm faced with a sale of concentrated security holdings. As the firm.s stake is large, its sales can lead to permanent and temporary price depressions. At the optimum, the institution chooses the liquidation interval to balance the exposure to the market return variance against the impact of its own sales on the realized return. We obtain closed-form solutions for power impact functions uncorrelated with returns. We also consider market impact correlated with the return process, i.e. a case where liquidity evaporates during severe price dislocations.
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