  We study optimal liquidation in the presence of linear temporary and
transient price impact along with taking into account a general price
predicting finite-variation signal. We formulate this problem as minimization
of a cost-risk functional over a class of absolutely continuous and
signal-adaptive strategies. The stochastic control problem is solved by
following a probabilistic and convex analytic approach. We show that the
optimal trading strategy is given by a system of four coupled forward-backward
SDEs, which can be solved explicitly. Our results reveal how the induced
transient price distortion provides together with the predictive signal an
additional predictor about future price changes. As a consequence, the optimal
signal-adaptive trading rate trades off exploiting the predictive signal
against incurring the transient displacement of the execution price from its
unaffected level. This answers an open question from Lehalle and Neuman [29] as
we show how to derive the unique optimal signal-adaptive liquidation strategy
when price impact is not only temporary but also transient.
