Price Impact of Large Orders Using Hawkes Processes
34 Pages Posted: 26 Nov 2016 Last revised: 11 Apr 2019
Date Written: April 9, 2019
We introduce a model to be used in the execution of large market orders in limit order books. We use a linear combination of self-exciting Hawkes processes to model asset-price dynamics, with the addition of a price-impact function that is concave in the order size. We introduce a criterion for a general price-impact function, which we then use to show how specification of a concave impact function affects order execution. Using our model we examine the immediate and permanent impacts of large orders, we look at the potential for price manipulation, and we show the effectiveness of the time-weighted average price strategy. Our model is such that price depends on the balance between the intensities of the Hawkes process, which can be interpreted as a dependence on order-flow imbalance.
Keywords: price-impact function, limit order books, execution of large orders, Hawkes processes
JEL Classification: D40, C10
Suggested Citation: Suggested Citation