Optimal Execution with Quadratic Variation Inventories
26 Pages Posted: 4 May 2021
Date Written: April 29, 2021
The first half of the paper is devoted to description and implementation of statistical tests arguing for the presence of a Brownian component in the inventories and wealth processes of individual traders. We use intra-day data from the Toronto Stock Exchange to provide empirical evidence of this claim. We work with regularly spaced time intervals, as well as with asynchronously observed data. The tests reveal with high significance the presence of a non-zero Brownian motion component. The second half of the paper is concerned with the analysis of trader behaviors throughout the day. We extend the theoretical analysis of an existing optimal execution model to accommodate the presence of It\^o inventory processes, and we compare empirically the optimal behavior of traders in such fitted models, to their actual behavior as inferred from the data.
Keywords: Quantitative Finance, High-Frequency Econometrics, Quadratic Variation, Brownian Motion
JEL Classification: C22, C44, G12
Suggested Citation: Suggested Citation