Partial Liquidation under Reference-Dependent Preferences

We propose a multiple optimal stopping model whereby an investor can sell a divisible asset position at times of her choosing. Investors have S-shaped reference-dependent preferences whereby utility is defined to... [ view full abstract ]

We propose a multiple optimal stopping model whereby an investor can sell a divisible asset position at times of her choosing. Investors have S-shaped reference-dependent preferences whereby utility is defined to be concave over gains and convex over losses. For a price process following a time-homogeneous diffusion, we employ the constructive potential-theoretic methods developed by Dayanik and Karatzas (2003). As an example we also revisit the optimal stopping model of Kyle, Ou-Yang and Xiong (2006) to allow for partial liquidation. In contrast to the extant literature, we find that the investor may partially liquidate the asset at distinct price thresholds.