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Optimal execution with non-linear transient market impact

Author

Listed:
  • Gianbiagio Curato
  • Jim Gatheral
  • Fabrizio Lillo

Abstract

We study the problem of the optimal execution of a large trade in the propagator model with non-linear transient impact. From brute force numerical optimization of the cost functional, we find that the optimal solution for a buy programme typically features a few short intense buying periods separated by long periods of weak selling. Indeed, in some cases, we find negative expected cost. We show that this undesirable characteristic of the non-linear transient impact model may be mitigated either by introducing a bid–ask spread cost or by imposing convexity of the instantaneous market impact function for large trading rates; the objective in each case is to robustify the solution in a parsimonious and natural way.

Suggested Citation

  • Gianbiagio Curato & Jim Gatheral & Fabrizio Lillo, 2017. "Optimal execution with non-linear transient market impact," Quantitative Finance, Taylor & Francis Journals, vol. 17(1), pages 41-54, January.
    • Handle: RePEc:taf:quantf:v:17:y:2017:i:1:p:41-54
    DOI: 10.1080/14697688.2016.1181274
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    References listed on IDEAS

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