Optimal Signal-Adaptive Trading with Temporary and Transient Price Impact
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Publication:5080132
DOI10.1137/20M1375486zbMATH Open1489.91238arXiv2002.09549OpenAlexW3006879552MaRDI QIDQ5080132FDOQ5080132
Authors: Eyal Neuman, Moritz Voß 
Publication date: 31 May 2022
Published in: SIAM Journal on Financial Mathematics (Search for Journal in Brave)
Abstract: 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.
Full work available at URL: https://arxiv.org/abs/2002.09549
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Portfolio theory (91G10) Applications of stochastic analysis (to PDEs, etc.) (60H30) Optimal stochastic control (93E20)
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Cited In (13)
- Optimal trade execution under small market impact and portfolio liquidation with semimartingale strategies
- Optimal execution considering trading signal and execution risk simultaneously
- Trading with the crowd
- Optimal Execution: A Review
- Adaptive signal processing of asset price dynamics with predictability analysis
- Consistent curves in the -world: optimal bonds portfolio
- Optimal trading and competition with information in the price impact model
- Optimal investment with a noisy signal of future stock prices
- A Mean-Field Game of Market-Making against Strategic Traders
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- Price impact on term structure
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