Mechanics of good trade execution in the framework of linear temporary market impact

DOI10.1080/14697688.2020.1814395MaRDI QIDQ5014181zbMATHOpenAlexFDO

Authors Claudio Bellani, Damiano Brigo

Publication date 1 December 2021

Published in Quantitative Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1909.10464

zbMATH Keywords

market microstructurequantitative financequantitative trading strategiesquantitative finance techniques

Mathematics Subject Classification ID

Financial markets (91G15)

Abstract: We define the concept of good trade execution and we construct explicit adapted good trade execution strategies in the framework of linear temporary market impact. Good trade execution strategies are dynamic, in the sense that they react to the actual realisation of the traded asset price path over the trading period; this is paramount in volatile regimes, where price trajectories can considerably deviate from their expected value. Remarkably however, the implementation of our strategies does not require the full specification of an SDE evolution for the traded asset price, making them robust across different models. Moreover, rather than minimising the expected trading cost, good trade execution strategies minimise trading costs in a pathwise sense, a point of view not yet considered in the literature. The mathematical apparatus for such a pathwise minimisation hinges on certain random Young differential equations that correspond to the Euler-Lagrange equations of the classical Calculus of Variations. These Young differential equations characterise our good trade execution strategies in terms of an initial value problem that allows for easy implementations.

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Cites work

• Algorithmic and high-frequency trading
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Cited in

(1)

• Double-Execution Strategies Using Path Signatures

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