Dynamic optimal execution in a mixed-market-impact Hawkes price model

DOI10.1007/S00780-015-0282-YMaRDI QIDQ261925zbMATH OpenOpenAlexFDO

Authors Aurélien Alfonsi, Pierre Blanc

Publication date 29 March 2016

Published in Finance and Stochastics (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1404.0648

zbMATH Keywords

high-frequency tradingHawkes processesmarket impact modelmarket microstructureoptimal executionprice manipulations

Mathematics Subject Classification ID

Point processes (e.g., Poisson, Cox, Hawkes processes) (60G55) Portfolio theory (91G10) Existence theories for optimal control problems involving ordinary differential equations (49J15) Microeconomic theory (price theory and economic markets) (91B24)

Abstract: We study a linear price impact model including other liquidity takers, whose flow of orders either follows a Poisson or a Hawkes process. The optimal execution problem is solved explicitly in this context, and the closed-formula optimal strategy describes in particular how one should react to the orders of other traders. This result enables us to discuss the viability of the market. It is shown that Poissonian arrivals of orders lead to quite robust Price Manipulation Strategies in the sense of Huberman and Stanzl. Instead, a particular set of conditions on the Hawkes model balances the self-excitation of the order flow with the resilience of the price, excludes Price Manipulation Strategies and gives some market stability.

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Cited in

(31)

• Clustering effects via Hawkes processes
• Portfolio liquidation games with self‐exciting order flow
• Optimal execution with regime-switching market resilience
• Optimal liquidation problem in illiquid markets
• Apparent impact: the hidden cost of one-shot trades
• Hawkes model for price and trades high-frequency dynamics
• Optimal execution with non-linear transient market impact
• Self-exciting price impact via negative resilience in stochastic order books
• Order book resilience, price manipulation, and the positive portfolio problem
• A simple microstructure model based on the Cox-BESQ process with application to optimal execution policy
• Long-time behavior of a Hawkes process-based limit order book
• Limit equations of adaptive Erlangization and their application to environmental management
• Liquidation with self-exciting price impact
• Characterising trader manipulation in a limit-order driven market
• Incorporating order-flow into optimal execution
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• High-frequency limit of Nash equilibria in a market impact game with transient price impact
• A discrete-time optimal execution problem with market prices subject to random environments
• Discrete homotopy analysis for optimal trading execution with nonlinear transient market impact
• Endogenous liquidity crises

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