Optimal liquidation under indirect price impact with propagator
(2023) , 36 pages
Files
ISBA_DP_2023-12.pdf
Open Access - Adobe PDF
- 1.18 MB
Details
- Authors
- Abstract
- We propose in this paper a new framework of optimal liquidation strategies for a trader seeking to liquidate his large inventory based on a jump-dependent price impact model with propagator. This new jump-dependent price impact model allows to best reproduce the empirical direct and indirect effects of market orders on the transaction price. More precisely, different choices of propagators are proposed and their implications in terms of temporary, permanent and transient impacts on the transaction price are discussed. For each choice of such kernels, we formulate the most relevant optimal liquidation problem faced by the trader, derive explicitly the related Hamilton-Jacobi-Bellman equation and solve it numerically. Moreover, we show how to extend our price impact model so to include the possibility for the trader to also use limit orders. We hence manage in this paper to propose an alternative more realistic and flexible description of the order book’s dynamic and to make a bridge between high-frequency price models and optimal liquidation problems.
- Affiliations
Citations
Dupret, J.-L., & Hainaut, D. (2023). Optimal liquidation under indirect price impact with propagator (LIDAM Discussion Paper ISBA 2023/12). https://hdl.handle.net/2078.5/100041