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The Convergence Rate of Stochastic Tracking with Application to Optimal Execution

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  • Marcel Nutz
  • Moritz Voss

Abstract

We study the quadratic tracking problem of a general stochastic target process with absolutely continuous controls, with and without terminal constraint. We derive explicit, non-asymptotic upper bounds in terms of a Besov-type modulus of the target. These bounds yield sharp explicit rates that specialize to the square-root order for semimartingale targets. We then apply these results to a generalized Obizhaeva--Wang execution model with random terminal inventory. We first develop a Hilbert-space approach to characterize its optimal strategy, which includes jumps. To avoid such trading spikes, one regularizes the problem by a quadratic trading-rate penalty with coefficient $\varepsilon$. We then show that the regularized optimal execution cost---and therefore the excess price impact cost of the regularized optimal strategy---converges at the sharp rate $O(\sqrt{\varepsilon})$. Since the regularized optimal strategy is not available in closed form, we further construct a nearly optimal strategy which is readily implementable and shares the same approximation rate.

Suggested Citation

  • Marcel Nutz & Moritz Voss, 2026. "The Convergence Rate of Stochastic Tracking with Application to Optimal Execution," Papers 2608.29468, arXiv.org.
  • Handle: RePEc:arx:papers:2608.29468
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    References listed on IDEAS

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    1. Obizhaeva, Anna A. & Wang, Jiang, 2013. "Optimal trading strategy and supply/demand dynamics," Journal of Financial Markets, Elsevier, vol. 16(1), pages 1-32.
    2. Ying Chen & Ulrich Horst & Hoang Hai Tran, 2025. "Optimal Trade Execution Strategy and Implementation with Deterministic Market Impact Parameters," Applied Mathematical Finance, Taylor & Francis Journals, vol. 32(1), pages 1-29, January.
    3. Julia Ackermann & Thomas Kruse & Mikhail Urusov, 2024. "Reducing Obizhaeva–Wang-type trade execution problems to LQ stochastic control problems," Finance and Stochastics, Springer, vol. 28(3), pages 813-863, July.
    4. Ulrich Horst & Evgueni Kivman, 2024. "Optimal trade execution under small market impact and portfolio liquidation with semimartingale strategies," Finance and Stochastics, Springer, vol. 28(3), pages 759-812, July.
    5. Paulwin Graewe & Ulrich Horst, 2016. "Optimal Trade Execution with Instantaneous Price Impact and Stochastic Resilience," Papers 1611.03435, arXiv.org, revised Jul 2017.
    6. Julia Ackermann & Thomas Kruse & Mikhail Urusov, 2020. "Optimal trade execution in an order book model with stochastic liquidity parameters," Papers 2006.05843, arXiv.org, revised Apr 2021.
    7. Marcel Nutz & Kevin Webster & Long Zhao, 2026. "Unwinding Stochastic Order Flow: When to Warehouse Trades," Mathematical Finance, Wiley Blackwell, vol. 36(3), pages 500-527, July.
    8. Aurélien Alfonsi & José Infante Acevedo, 2014. "Optimal execution and price manipulations in time-varying limit order books," Post-Print hal-00687193, HAL.
    9. Aurélien Alfonsi & José Infante Acevedo, 2014. "Optimal Execution and Price Manipulations in Time-varying Limit Order Books," Applied Mathematical Finance, Taylor & Francis Journals, vol. 21(3), pages 201-237, July.
    10. Antje Fruth & Torsten Schöneborn & Mikhail Urusov, 2019. "Optimal trade execution in order books with stochastic liquidity," Mathematical Finance, Wiley Blackwell, vol. 29(2), pages 507-541, April.
    11. Leonid Dolinskyi & Yan Dolinsky, 2024. "Optimal liquidation with high risk aversion and small linear price impact," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 47(1), pages 183-198, June.
    12. Antje Fruth & Torsten Schöneborn & Mikhail Urusov, 2014. "Optimal Trade Execution And Price Manipulation In Order Books With Time-Varying Liquidity," Mathematical Finance, Wiley Blackwell, vol. 24(4), pages 651-695, October.
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