Portfolio Liquidation Under Transient Price Impact – Theoretical Solution and Implementation With 100 NASDAQ Stocks

22 Pages Posted: 7 Jan 2020

See all articles by Ying Chen

Ying Chen

National University of Singapore (NUS) - Department of Mathematics

Ulrich Horst

Humboldt University of Berlin

Hoang Hai Tran

National University of Singapore (NUS) - Department of Statistics and Applied Probability

Date Written: December 15, 2019

Abstract

We derive an explicit solution for deterministic market impact parameters in the Graewe and Horst (2017) portfolio liquidation model. The model allows to combine various forms of market impact, namely instantaneous, permanent and temporary. We show that the solutions to the two benchmark models of Almgren and Chriss (2001) and of Obizhaeva and Wang (2013) are obtained as special cases. We relate the different forms of market impact to the microstructure of limit order book markets and show how the impact parameters can be estimated from public market data. We investigate the numerical performance of the derived optimal trading strategy based on high frequency limit order books of 100 NASDAQ stocks that represent a range of market impact profiles. It shows the strategy achieves significant cost savings compared to the benchmark models of Almgren and Chriss (2001) and Obizhaeva and Wang (2013).

Keywords: Liquidity Risk, Optimal Trading Strategy, Portfolio Liquidation, Hawkes process

Suggested Citation

Chen, Ying and Horst, Ulrich and Tran, Hoang Hai, Portfolio Liquidation Under Transient Price Impact – Theoretical Solution and Implementation With 100 NASDAQ Stocks (December 15, 2019). Available at SSRN: https://ssrn.com/abstract=3504133 or http://dx.doi.org/10.2139/ssrn.3504133

Ying Chen

National University of Singapore (NUS) - Department of Mathematics ( email )

119076
Singapore

Ulrich Horst

Humboldt University of Berlin ( email )

Unter den Linden 6
Berlin, AK Berlin 10099
Germany

Hoang Hai Tran (Contact Author)

National University of Singapore (NUS) - Department of Statistics and Applied Probability ( email )

Block S16, Level 7,
6 Science Drive 2
Singapore, 117546

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