Optimal Trade Execution and Price Manipulation in Order Books with Time-Varying Liquidity
Technical University Berlin
AHL (Man Investments); University of Oxford - Oxford-Man Institute of Quantitative Finance
University of Ulm - Department of Mathematics and Economics
September 11, 2011
In financial markets, liquidity is not constant over time but exhibits strong seasonal patterns. In this article we consider a limit order book model that allows for time-dependent, deterministic depth and resilience of the book and determine optimal portfolio liquidation strategies. In a first model variant, we propose a trading dependent spread that increases when market orders are matched against the order book. In this model no price manipulation occurs and the optimal strategy is of the wait region - buy region type often encountered in singular control problems. In a second model, we assume that there is no spread in the order book. Under this assumption we find that price manipulation can occur, depending on the model parameters. Even in the absence of classical price manipulation there may be transaction triggered price manipulation. In specific cases, we can state the optimal strategy in closed form.
Number of Pages in PDF File: 39
Keywords: Market impact model, optimal order execution, limit order book, resilience, time-varying liquidity, price manipulation, transaction-triggered price manipulationworking papers series
Date posted: September 12, 2011 ; Last revised: March 12, 2012
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo2 in 0.344 seconds