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Optimal Liquidation with Signals: the General Propagator Case

Author

Listed:
  • Eduardo Abi Jaber

    (CMAP - Centre de Mathématiques Appliquées - Ecole Polytechnique - X - École polytechnique - CNRS - Centre National de la Recherche Scientifique)

  • Eyal Neuman

    (Imperial College London)

Abstract

We consider a class of optimal liquidation problems where the agent's transactions create transient price impact driven by a Volterra-type propagator along with temporary price impact. We formulate these problems as minimization of a revenue-risk functionals, where the agent also exploits available information on a progressively measurable price predicting signal. By using an infinite dimensional stochastic control approach, we characterize the value function in terms of a solution to a free-boundary $L^2$-valued backward stochastic differential equation and an operator-valued Riccati equation. We then derive analytic solutions to these equations which yields an explicit expression for the optimal trading strategy. We show that our formulas can be implemented in a straightforward and efficient way for a large class of price impact kernels with possible singularities such as the power-law kernel.

Suggested Citation

  • Eduardo Abi Jaber & Eyal Neuman, 2022. "Optimal Liquidation with Signals: the General Propagator Case," Working Papers hal-03835948, HAL.
    • Handle: RePEc:hal:wpaper:hal-03835948
    Note: View the original document on HAL open archive server: https://hal.science/hal-03835948
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    References listed on IDEAS

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    5. Eduardo Abi Jaber & Enzo Miller & Huyen Pham, 2021. "Integral Operator Riccati Equations Arising in Stochastic Volterra Control Problems," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-03264893, HAL.
    6. Eduardo Abi Jaber, 2022. "The characteristic function of Gaussian stochastic volatility models: an analytic expression," Working Papers hal-02946146, HAL.
    7. Eduardo Abi Jaber & Omar El Euch, 2019. "Multi-factor approximation of rough volatility models," Post-Print hal-01697117, HAL.
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    9. Charles-Albert Lehalle & Eyal Neuman, 2019. "Incorporating signals into optimal trading," Finance and Stochastics, Springer, vol. 23(2), pages 275-311, April.
    10. Eduardo Abi Jaber, 2022. "The characteristic function of Gaussian stochastic volatility models: an analytic expression," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-02946146, HAL.
    11. Eduardo Abi Jaber, 2020. "The characteristic function of Gaussian stochastic volatility models: an analytic expression," Papers 2009.10972, arXiv.org, revised May 2022.
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    14. Christopher Lorenz & Alexander Schied, 2013. "Drift dependence of optimal trade execution strategies under transient price impact," Finance and Stochastics, Springer, vol. 17(4), pages 743-770, October.
    15. Eduardo Abi Jaber, 2022. "The characteristic function of Gaussian stochastic volatility models: an analytic expression," Finance and Stochastics, Springer, vol. 26(4), pages 733-769, October.
    16. Jim Gatheral, 2010. "No-dynamic-arbitrage and market impact," Quantitative Finance, Taylor & Francis Journals, vol. 10(7), pages 749-759.
    17. Eduardo Abi Jaber & Enzo Miller & Huyen Pham, 2021. "Integral Operator Riccati Equations Arising in Stochastic Volterra Control Problems," Post-Print hal-03264893, HAL.
    18. Eyal Neuman & Alexander Schied, 2016. "Optimal portfolio liquidation in target zone models and catalytic superprocesses," Finance and Stochastics, Springer, vol. 20(2), pages 495-509, April.
    19. Martin Forde & Leandro Sánchez-Betancourt & Benjamin Smith, 2022. "Optimal trade execution for Gaussian signals with power-law resilience," Quantitative Finance, Taylor & Francis Journals, vol. 22(3), pages 585-596, March.
    20. Eyal Neuman & Moritz Vo{ss}, 2020. "Optimal Signal-Adaptive Trading with Temporary and Transient Price Impact," Papers 2002.09549, arXiv.org, revised Jan 2022.
    21. Christopher Lorenz & Alexander Schied, 2012. "Drift dependence of optimal trade execution strategies under transient price impact," Papers 1204.2716, arXiv.org, revised Mar 2013.
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    Citations

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    Cited by:

    1. Eyal Neuman & Yufei Zhang, 2023. "Statistical Learning with Sublinear Regret of Propagator Models," Papers 2301.05157, arXiv.org.
    2. Dupret, Jean-Loup & Hainaut, Donatien, 2023. "Optimal liquidation under indirect price impact with propagator," LIDAM Discussion Papers ISBA 2023012, Université catholique de Louvain, Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA).
    3. Natascha Hey & Jean-Philippe Bouchaud & Iacopo Mastromatteo & Johannes Muhle-Karbe & Kevin Webster, 2023. "The Cost of Misspecifying Price Impact," Papers 2306.00599, arXiv.org.
    4. Eduardo Abi Jaber & Eyal Neuman & Moritz Voss, 2023. "Equilibrium in Functional Stochastic Games with Mean-Field Interaction," Working Papers hal-04119787, HAL.
    5. Eduardo Abi Jaber & Eyal Neuman & Moritz Vo{ss}, 2023. "Equilibrium in Functional Stochastic Games with Mean-Field Interaction," Papers 2306.05433, arXiv.org, revised Feb 2024.
    6. Marcel Nutz & Kevin Webster & Long Zhao, 2023. "Unwinding Stochastic Order Flow: When to Warehouse Trades," Papers 2310.14144, arXiv.org.

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