Optimal Signal-Adaptive Trading with Temporary and Transient Price Impact
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Publication:5080132
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.
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- A Mean-Field Game of Market-Making against Strategic Traders
- Optimal order execution under price impact: a hybrid model
- Portfolio choice with small temporary and transient price impact
- Optimal execution considering trading signal and execution risk simultaneously
- Incorporating signals into optimal trading
- Optimal trade execution for Gaussian signals with power-law resilience
- Optimal investment with a noisy signal of future stock prices
- Optimal trade execution under small market impact and portfolio liquidation with semimartingale strategies
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