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Optimal Trade Execution in Illiquid Markets


  • Erhan Bayraktar
  • Mike Ludkovski


We study optimal trade execution strategies in financial markets with discrete order flow. The agent has a finite liquidation horizon and must minimize price impact given a random number of incoming trade counterparties. Assuming that the order flow $N$ is given by a Poisson process, we give a full analysis of the properties and computation of the optimal dynamic execution strategy. Extensions, whereby (a) $N$ is a fully-observed regime-switching Poisson process; and (b) $N$ is a Markov-modulated compound Poisson process driven by a hidden Markov chain, are also considered. We derive and compare the properties of the three cases and illustrate our results with computational examples.

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  • Erhan Bayraktar & Mike Ludkovski, 2009. "Optimal Trade Execution in Illiquid Markets," Papers 0902.2516,
  • Handle: RePEc:arx:papers:0902.2516

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    Cited by:

    1. Erhan Bayraktar & Michael Ludkovski, 2014. "Liquidation In Limit Order Books With Controlled Intensity," Mathematical Finance, Wiley Blackwell, vol. 24(4), pages 627-650, October.
    2. Kyle Bechler & Mike Ludkovski, 2014. "Optimal Execution with Dynamic Order Flow Imbalance," Papers 1409.2618,, revised Oct 2014.
    3. Aur'elien Alfonsi & Pierre Blanc, 2014. "Dynamic optimal execution in a mixed-market-impact Hawkes price model," Papers 1404.0648,, revised Jun 2015.
    4. Roman Gayduk & Sergey Nadtochiy, 2015. "Liquidity Effects of Trading Frequency," Papers 1508.07914,, revised May 2017.
    5. Salvatore Federico & Paul Gassiat & Fausto Gozzi, 2017. "Impact Of Time Illiquidity In A Mixed Market Without Full Observation," Mathematical Finance, Wiley Blackwell, vol. 27(2), pages 401-437, April.

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