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General Intensity Shapes in Optimal Liquidation

Author

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  • Olivier Gu'eant
  • Charles-Albert Lehalle

Abstract

The classical literature on optimal liquidation, rooted in Almgren-Chriss models, tackles the optimal liquidation problem using a trade-off between market impact and price risk. Therefore, it only answers the general question of the optimal liquidation rhythm. The very question of the actual way to proceed with liquidation is then rarely dealt with. Our model, that incorporates both price risk and non-execution risk, is an attempt to tackle this question using limit orders. The very general framework we propose to model liquidation generalizes the existing literature on optimal posting of limit orders. We consider a risk-adverse agent whereas the model of Bayraktar and Ludkovski only tackles the case of a risk-neutral one. We consider very general functional forms for the execution process intensity, whereas Gu\'eant et al. is restricted to exponential intensity. Eventually, we link the execution cost function of Almgren-Chriss models to the intensity function in our model, providing then a way to see Almgren-Chriss models as a limit of ours.

Suggested Citation

  • Olivier Gu'eant & Charles-Albert Lehalle, 2012. "General Intensity Shapes in Optimal Liquidation," Papers 1204.0148, arXiv.org, revised Jun 2013.
  • Handle: RePEc:arx:papers:1204.0148
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    References listed on IDEAS

    as
    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. Aur'elien Alfonsi & Antje Fruth & Alexander Schied, 2007. "Optimal execution strategies in limit order books with general shape functions," Papers 0708.1756, arXiv.org, revised Feb 2010.
    3. Alexander Schied & Torsten Schöneborn, 2009. "Risk aversion and the dynamics of optimal liquidation strategies in illiquid markets," Finance and Stochastics, Springer, vol. 13(2), pages 181-204, April.
    4. Schied, Alexander & Schöneborn, Torsten, 2007. "Optimal Portfolio Liquidation for CARA Investors," MPRA Paper 5075, University Library of Munich, Germany.
    5. Alexander Schied & Torsten Schoneborn & Michael Tehranchi, 2010. "Optimal Basket Liquidation for CARA Investors is Deterministic," Applied Mathematical Finance, Taylor & Francis Journals, vol. 17(6), pages 471-489.
    6. Sophie Laruelle & Charles-Albert Lehalle & Gilles Pag`es, 2009. "Optimal split of orders across liquidity pools: a stochastic algorithm approach," Papers 0910.1166, arXiv.org, revised May 2010.
    7. Obizhaeva, Anna A. & Wang, Jiang, 2013. "Optimal trading strategy and supply/demand dynamics," Journal of Financial Markets, Elsevier, vol. 16(1), pages 1-32.
    8. Sophie Laruelle & Charles-Albert Lehalle & Gilles Pag`es, 2011. "Optimal posting price of limit orders: learning by trading," Papers 1112.2397, arXiv.org, revised Sep 2012.
    9. Bertsimas, Dimitris & Lo, Andrew W., 1998. "Optimal control of execution costs," Journal of Financial Markets, Elsevier, vol. 1(1), pages 1-50, April.
    10. Aurelien Alfonsi & Antje Fruth & Alexander Schied, 2010. "Optimal execution strategies in limit order books with general shape functions," Quantitative Finance, Taylor & Francis Journals, vol. 10(2), pages 143-157.
    11. Fabien Guilbaud & Mohamed Mnif & Huy^en Pham, 2010. "Numerical methods for an optimal order execution problem," Papers 1006.0768, arXiv.org.
    12. Gur Huberman & Werner Stanzl, 2005. "Optimal Liquidity Trading," Review of Finance, Springer, vol. 9(2), pages 165-200, June.
    13. He, Hua & Mamaysky, Harry, 2005. "Dynamic trading policies with price impact," Journal of Economic Dynamics and Control, Elsevier, vol. 29(5), pages 891-930, May.
    14. repec:dau:papers:123456789/7391 is not listed on IDEAS
    15. Aurélien Alfonsi & Alexander Schied, 2010. "Optimal trade execution and absence of price manipulations in limit order book models," Post-Print hal-00397652, HAL.
    16. Jim Gatheral, 2010. "No-dynamic-arbitrage and market impact," Quantitative Finance, Taylor & Francis Journals, vol. 10(7), pages 749-759.
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    Citations

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    Cited by:

    1. Saran Ahuja & George Papanicolaou & Weiluo Ren & Tzu-Wei Yang, 2016. "Limit order trading with a mean reverting reference price," Papers 1607.00454, arXiv.org, revised Nov 2016.
    2. Rama Cont & Arseniy Kukanov, 2012. "Optimal order placement in limit order markets," Working Papers hal-00737491, HAL.
    3. Roman Gayduk & Sergey Nadtochiy, 2016. "Endogenous Formation of Limit Order Books: Dynamics Between Trades," Papers 1605.09720, arXiv.org, revised Jun 2017.
    4. Pierre Cardaliaguet & Charles-Albert Lehalle, 2016. "Mean Field Game of Controls and An Application To Trade Crowding," Papers 1610.09904, arXiv.org, revised Sep 2017.
    5. Xuefeng Gao & S. J. Deng, 2014. "Hydrodynamic limit of order book dynamics," Papers 1411.7502, arXiv.org, revised Feb 2016.
    6. Jean-David Fermanian & Olivier Gu'eant & Jiang Pu, 2015. "The behavior of dealers and clients on the European corporate bond market: the case of Multi-Dealer-to-Client platforms," Papers 1511.07773, arXiv.org, revised Mar 2017.
    7. Álvaro Cartea & Sebastian Jaimungal & Damir Kinzebulatov, 2016. "Algorithmic Trading With Learning," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 19(04), pages 1-30, June.
    8. Etienne Chevalier & Vathana Ly Vath & Simone Scotti & Alexandre Roch, 2016. "Optimal Execution Cost For Liquidation Through A Limit Order Market," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 19(01), pages 1-26, February.
    9. repec:wsi:ijtafx:v:20:y:2017:i:01:n:s0219024917500054 is not listed on IDEAS
    10. Olivier Gu'eant, 2016. "Optimal market making," Papers 1605.01862, arXiv.org, revised May 2017.
    11. Rama Cont & Arseniy Kukanov, 2012. "Optimal order placement in limit order markets," Papers 1210.1625, arXiv.org, revised Nov 2014.

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