English

Optimal trade execution in an order book model with stochastic liquidity parameters

Trading and Market Microstructure 2021-04-16 v2 Optimization and Control Probability

Abstract

We analyze an optimal trade execution problem in a financial market with stochastic liquidity. To this end we set up a limit order book model in which both order book depth and resilience evolve randomly in time. Trading is allowed in both directions and at discrete points in time. We derive an explicit recursion that, under certain structural assumptions, characterizes minimal execution costs. We also discuss several qualitative aspects of optimal strategies, such as existence of profitable round trips or closing the position in one go, and compare our findings with the literature.

Keywords

Cite

@article{arxiv.2006.05843,
  title  = {Optimal trade execution in an order book model with stochastic liquidity parameters},
  author = {Julia Ackermann and Thomas Kruse and Mikhail Urusov},
  journal= {arXiv preprint arXiv:2006.05843},
  year   = {2021}
}

Comments

39 pages; to appear in SIAM J. Financial Math