Liquidation with Self-Exciting Price Impact

12 Pages Posted: 20 Dec 2014

See all articles by Thomas Cayé

Thomas Cayé

Dublin City University - School of Mathematical Sciences

Johannes Muhle-Karbe

Carnegie Mellon University - Department of Mathematical Sciences

Date Written: December 19, 2014

Abstract

We study optimal execution with "self-exciting" price impact, where persistent trades not only incur price impact but also increase the execution costs for successive orders. This model is motivated by an equilibrium between fundamental sellers, market makers, and end users. For risk-neutral investors, it leads to faster initial trading compared to the constant execution rate of Bertsimas and Lo (1998). For risk-averse liquidation as in Almgren and Chriss (1999, 2001) or Huberman and Stanzl (2005), self-excitement has a moderating effect: slow liquidation is sped up, whereas fast schedules are slowed down.

Keywords: optimal liquidation, price impact, self-excitement, risk aversion

JEL Classification: G11

Suggested Citation

Cayé, Thomas and Muhle-Karbe, Johannes, Liquidation with Self-Exciting Price Impact (December 19, 2014). Swiss Finance Institute Research Paper No. 14-74. Available at SSRN: https://ssrn.com/abstract=2540630 or http://dx.doi.org/10.2139/ssrn.2540630

Thomas Cayé

Dublin City University - School of Mathematical Sciences ( email )

Dublin
Ireland

Johannes Muhle-Karbe (Contact Author)

Carnegie Mellon University - Department of Mathematical Sciences ( email )

Pittsburgh, PA 15213-3890
United States

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