Optimal Trade Execution and Price Manipulation in Order Books with Time-Varying Liquidity

40 Pages Posted: 12 Sep 2011 Last revised: 9 Dec 2015

See all articles by Antje Fruth

Antje Fruth

Technical University Berlin

Torsten Schoeneborn

AHL (Man Investments); University of Oxford - Oxford-Man Institute of Quantitative Finance

Mikhail Urusov

University of Ulm - Department of Mathematics and Economics

Multiple version iconThere are 2 versions of this paper

Date Written: September 11, 2011

Abstract

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.

Keywords: Market impact model, optimal order execution, limit order book, resilience, time-varying liquidity, price manipulation, transaction-triggered price manipulation

Suggested Citation

Fruth, Antje and Schoeneborn, Torsten and Urusov, Mikhail, Optimal Trade Execution and Price Manipulation in Order Books with Time-Varying Liquidity (September 11, 2011). Available at SSRN: https://ssrn.com/abstract=1925808 or http://dx.doi.org/10.2139/ssrn.1925808

Antje Fruth (Contact Author)

Technical University Berlin ( email )

Straße des 17
Berlin, 10623
Germany

HOME PAGE: http://www.math.tu-berlin.de/~fruth

Torsten Schoeneborn

AHL (Man Investments) ( email )

Sugar Quay
Lower Thames Street
London, EC3R 6DU
Great Britain

University of Oxford - Oxford-Man Institute of Quantitative Finance ( email )

Eagle House
Walton Well Road
Oxford, Oxfordshire OX2 6ED
United Kingdom

Mikhail Urusov

University of Ulm - Department of Mathematics and Economics ( email )

Helmholzstrasse
Ulm, D-89081
Germany

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