Paper: arXiv 2603.14546

Authors: Dohyun Ahn, Hongyi Jiang

Abstract

We study the problem of asset liquidation in financial systems. During financial crises, asset liquidation is often inevitable but can lead to substantial losses if a significant amount of illiquid assets are sold simultaneously at depressed prices – a phenomenon known as price impact. To tackle this challenge, we consider a two-period liquidation model that allows for early liquidation prior to clearing, thereby mitigating price impact at clearing, and we develop a worst-case approach to solve the decision-making problem on the optimal size of early liquidation. Specifically, we propose a robust optimal strategy – a tractable liquidation approach that maximizes the worst-case value of liquid assets at clearing, taking into account the uncertainty of other banks’ early liquidation decisions. We derive a (semi-)closed-form representation of this strategy in a practical scenario involving permanent price impact and analyze its sensitivity to that impact’s magnitude. We further identify its closed-form expression in another practical scenario featuring interbank exposures. Our findings, although built upon a stylized model, offer valuable guidelines for developing robust liquidation strategies that mitigate losses resulting from asset liquidation.

Complexity vs Empirical Score

  • Math Complexity: 7.5/10
  • Empirical Rigor: 3.0/10
  • Quadrant: Lab Rats — theoretically deep, empirically untested

Why this score: The paper presents a rigorous theoretical framework using optimization and game theory to address systemic risk and price impact in early liquidation scenarios, offering closed-form and semi-closed-form solutions. However, it lacks empirical validation, backtesting, or real-world financial data application, placing it heavily in the theoretical domain.

Research Flowchart

  flowchart TD
    A[Research Goal: Develop robust optimal early liquidation strategy to minimize systemic price impact losses] --> B[Inputs: Interbank exposures, permanent price impact, and uncertainty of other banks' actions]
    B --> C[Methodology: Two-period model with robust worst-case optimization framework]
    C --> D[Computational Derivation: Calculate worst-case value of liquid assets at clearing]
    D --> E[Outcomes: Closed-form robust strategies & sensitivity analysis for systemic risk mitigation]

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0 of 120 cited works are in the corpus; resolved via arXiv source bundles, Semantic Scholar and OpenAlex. Corpus-wide: 2518 linked papers.