Article
Optimal execution strategies in limit order books with general shape functions
Quantitative Finance (Impact Factor: 0.82). 08/2007; DOI: 10.2139/ssrn.1510104
Source: OAI

Article: Trading with Small Price Impact
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ABSTRACT: An investor trades a safe and several risky assets with linear price impact to maximize expected utility from terminal wealth. In the limit for small impact costs, we explicitly determine the optimal policy and welfare, in a general Markovian setting allowing for stochastic market, cost, and preference parameters. These results shed light on the general structure of the problem at hand, and also unveil close connections to optimal execution problems and to other market frictions such as proportional and fixed transaction costs.02/2014;  [Show abstract] [Hide abstract]
ABSTRACT: We study an optimal execution problem in a market model which considers market impact. First we study a discretetime model and describe a value function. Then, by shortening the intervals of the execution times, we derive the value function of a continuoustime model and study some of its properties (continuity, semigroup property and viscosity property). We show that these vary with the strength of the market impact. We introduce some examples which show that the forms of the optimal strategies change completely, depending on the amount of the trader's security holdings.Finance and Stochastics 05/2014; 18(3):695732. · 1.21 Impact Factor  [Show abstract] [Hide abstract]
ABSTRACT: In limit order book markets, traders face the problem whether to display or hide their orders. While hiding reduces exposure impact, exposing can increase execution priority. Based on order flow dynamics, we develop a structural model that captures this tradeoff. A central aspect of this work is the market impact of exposure: exposed limit orders affect incoming order flow. We derive explicit characterizations of the optimal exposure strategy under various market specifications. Using highresolution ITCH data, we estimate the true impact of the exposure and calculate the optimal exposure for various stocks under highfrequency trading horizons. It turns out that exposure does mainly affect the supply side of liquidity. Our results suggests that the use of hidden orders can significantly increase trade performance.05/2014;
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