Optimal Execution with Quadratic Variation Inventories

DOI10.1137/21M1416564MaRDI QIDQ6169622zbMATH OpenOpenAlexFDO

Authors René Carmona, Laura Leal

Publication date 15 August 2023

Published in SIAM Journal on Financial Mathematics (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/2104.14615

zbMATH Keywords

Brownian motionhigh-frequency econometricsquadratic variationquantitative finance

Mathematics Subject Classification ID

Applications of Brownian motions and diffusion theory (population genetics, absorption problems, etc.) (60J70) Applications of statistics to actuarial sciences and financial mathematics (62P05) Financial markets (91G15) Numerical methods (including Monte Carlo methods) (91G60)

Abstract: The first half of the paper is devoted to description and implementation of statistical tests arguing for the presence of a Brownian component in the inventories and wealth processes of individual traders. We use intra-day data from the Toronto Stock Exchange to provide empirical evidence of this claim. We work with regularly spaced time intervals, as well as with asynchronously observed data. The tests reveal with high significance the presence of a non-zero Brownian motion component. The second half of the paper is concerned with the analysis of trader behaviors throughout the day. We extend the theoretical analysis of an existing optimal execution model to accommodate the presence of It^o inventory processes, and we compare empirically the optimal behavior of traders in such fitted models, to their actual behavior as inferred from the data.

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Cites work

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Cited in

(11)

• Comparison Between the Mean-Variance Optimal and the Mean-Quadratic-Variation Optimal Trading Strategies
• Quadratic-Variation-Based Dynamic Strategies
• OPTIMAL EXECUTION HORIZON
• Optimal order execution under price impact: a hybrid model
• Optimal trading and competition with information in the price impact model
• Long time behavior of optimal liquidation problems with semimartingale strategies and external flows
• When order execution meets informed trading
• Relative entropy-regularized robust optimal order execution
• Unwinding stochastic order flow: when to warehouse trades
• Optimal execution under price impact in a heterogeneous characteristic timescale
• Multi-asset optimal trade execution with stochastic cross-effects: an Obizhaeva-Wang-type framework

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