Price Impact of Large Orders Using Hawkes Processes

34 Pages Posted: 26 Nov 2016 Last revised: 11 Apr 2019

See all articles by Lucas Amaral

Lucas Amaral

NYU Tandon School Of Engineering

Andrew Papanicolaou

NYU Tandon School of Engineering, Department of Finance and Risk Engineering

Date Written: April 9, 2019

Abstract

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

Amaral, Lucas and Papanicolaou, Andrew, Price Impact of Large Orders Using Hawkes Processes (April 9, 2019). NYU Tandon Research Paper No. 2874042. Available at SSRN: https://ssrn.com/abstract=2874042 or http://dx.doi.org/10.2139/ssrn.2874042

Lucas Amaral

NYU Tandon School Of Engineering ( email )

NY
United States

Andrew Papanicolaou (Contact Author)

NYU Tandon School of Engineering, Department of Finance and Risk Engineering ( email )

6 Metrotech Center
Brooklyn, NY 11201
United States

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