High-Resilience Limits of Block-Shaped Order Books
12 Pages Posted: 27 Sep 2014
Date Written: September 25, 2014
We show that wealth processes in the block-shaped order book model of Obizhaeva/Wang converge to their counterparts in the reduced-form model proposed by Almgren/Chriss, as the resilience of the order book tends to infinity. As an application of this limit theorem, we explain how to reduce portfolio choice in highly-resilient Obizhaeva/Wang models to the corresponding problem in an Almgren/Chriss setup with small quadratic trading costs.
Keywords: Limit order books; price impact; high-resilience limit
JEL Classification: G11, G12
Suggested Citation: Suggested Citation