Optimal trade execution in illiquid markets

DOI10.1111/J.1467-9965.2010.00446.XMaRDI QIDQ3100751zbMATHOpenAlexFDO

Authors Erhan Bayraktar, Michael Ludkovski

Publication date 21 November 2011

Published in Mathematical Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/0902.2516

zbMATH Keywords

Markov-modulated Poisson processliquidity modelingoptimal order executiondark pools

Mathematics Subject Classification ID

Portfolio theory (91G10) Applications of renewal theory (reliability, demand theory, etc.) (60K10) Financial applications of other theories (91G80)

Abstract: We study optimal trade execution strategies in financial markets with discrete order flow. The agent has a finite liquidation horizon and must minimize price impact given a random number of incoming trade counterparties. Assuming that the order flow $N$ is given by a Poisson process, we give a full analysis of the properties and computation of the optimal dynamic execution strategy. Extensions, whereby (a) $N$ is a fully-observed regime-switching Poisson process; and (b) $N$ is a Markov-modulated compound Poisson process driven by a hidden Markov chain, are also considered. We derive and compare the properties of the three cases and illustrate our results with computational examples.

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Cited in

(54)

• Optimal trade execution in illiquid markets
• Optimal trade execution with instantaneous price impact and stochastic resilience
• The Shadow Price of Latency: Improving Intraday Fill Ratios in Foreign Exchange Markets
• Strategic trading in illiquid markets.
• Optimal liquidation problem in illiquid markets
• Optimal Execution: A Review
• SIMULTANEOUS TRADING IN ‘LIT’ AND DARK POOLS
• Apparent impact: the hidden cost of one-shot trades
• Optimal investment on finite horizon with random discrete order flow in illiquid markets
• Endogenous formation of limit order books: dynamics between trades
• Optimal market making under partial information with general intensities
• An algorithmic approach to optimal asset liquidation problems
• Liquidation in limit order books with controlled intensity
• Optimal trade execution and price manipulation in order books with time-varying liquidity
• Algorithmic trading with model uncertainty
• Impact of time illiquidity in a mixed market without full observation
• Optimal order execution using hidden orders
• Optimal control of semi-Markov processes with a backward stochastic differential equations approach
• Multivariate Hawkes-based models in limit order book: European and spread option pricing
• Optimal trade execution under jump diffusion process: a mean-VaR approach
• OPTIMAL EXECUTION HORIZON
• Optimal trading with stochastic liquidity and volatility
• Optimal trade execution in order books with stochastic liquidity
• Optimal timing for short covering of an illiquid security
• Mean-Field Game Strategies for Optimal Execution
• A guided tour of new results on ``trade execution in illiquid markets
• Optimal liquidity-based trading tactics
• Optimal trade execution: a mean quadratic variation approach
• Optimal execution with stochastic delay
• Algorithmic trading with learning
• Rate control under heavy traffic with strategic servers
• Optimal decisions in a time priority queue
• Dynamic equilibrium limit order book model and optimal execution problem
• Optimal trade execution under price-sensitive risk preferences
• Incorporating order-flow into optimal execution
• An explicit optimal strategy for flow trades at NASDAQ around its close
• Optimal execution with limit and market orders
• Does the Prohibition of Trade-Through Hurt Liquidity Demanders?
• Optimal execution with uncertain order fills in Almgren-Chriss framework
• Execution in an aggregator
• Optimal order placement in limit order markets
• Dynamic optimal execution in a mixed-market-impact Hawkes price model
• Càdlàg semimartingale strategies for optimal trade execution in stochastic order book models
• Applications of microscopic modelling in finance
• Optimal trade execution in an order book model with stochastic liquidity parameters
• Discrete-time optimal execution under a generalized price impact model with markovian exogenous orders
• Optimal trade execution under stochastic volatility and liquidity
• Optimal trade execution for Gaussian signals with power-law resilience
• Execution shortfall algorithms under regime switching
• Optimal liquidation in dark pools
• Optimal execution and block trade pricing: a general framework
• Optimal execution with dynamic order flow imbalance
• Optimal trade execution under endogenous pressure to liquidate: theory and numerical solutions
• Pricing European options in a discrete time model for the limit order book

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