Liquidation in Target Zone Models

Abstract

We study optimal liquidation in “target zone models” — asset prices with a reflecting boundary enforced by regulatory interventions. This can be treated as a special case of an Almgren–Chriss model with running and terminal inventory costs and general predictive signals about price changes. The optimal liquidation rate in target-zone models can in turn be characterized as the “theta” of a lookback option, leading to explicit formulas for Bachelier or Black–Scholes dynamics.