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Liquidation with Self-Exciting Price Impact

Author

Listed:
  • Thomas Cayé

    (Dublin City University - School of Mathematical Sciences)

  • Johannes Muhle-Karbe

    (Imperial College London - Department of Mathematics)

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.

Suggested Citation

  • Thomas Cayé & Johannes Muhle-Karbe, 2014. "Liquidation with Self-Exciting Price Impact," Swiss Finance Institute Research Paper Series 14-74, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1474
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    File URL: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2540630
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    Cited by:

    1. Peter Bank & 'Alvaro Cartea & Laura Korber, 2023. "Optimal execution and speculation with trade signals," Papers 2306.00621, arXiv.org, revised Jul 2023.

    More about this item

    Keywords

    optimal liquidation; price impact; self-excitement; risk aversion;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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