Optimal trade execution and absence of price manipulations in limit order book models
We analyze the existence of price manipulation and optimal trade execution strategies in a model for an electronic limit order book with nonlinear price impact and exponential resilience. Our main results show that, under general conditions on the shape function of the limit order book, placing deterministic trade sizes at trading dates that are homogeneously spaced is optimal within a large class of adaptive strategies with arbitrary trading dates. This extends results from our earlier work with A. Fruth. Perhaps even more importantly, our analysis yields as a corollary that our model does not admit price manipulation strategies. This latter result contrasts the recent findings of Gatheral , where, in a related but different model, exponential resilience was found to give rise to price manipulation strategies when price impact is nonlinear.
|Date of creation:||2010|
|Date of revision:|
|Publication status:||Published, SIAM Journal on Financial Mathematics, 2010, 1, 490-522|
|Note:||View the original document on HAL open archive server: http://hal.archives-ouvertes.fr/hal-00397652|
|Contact details of provider:|| Web page: http://hal.archives-ouvertes.fr/|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Anna Obizhaeva & Jiang Wang, 2005. "Optimal Trading Strategy and Supply/Demand Dynamics," NBER Working Papers 11444, National Bureau of Economic Research, Inc.
- Schied, Alexander & Schoeneborn, Torsten, 2008.
"Risk aversion and the dynamics of optimal liquidation strategies in illiquid markets,"
7105, University Library of Munich, Germany.
- 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.
- Gur Huberman & Werner Stanzl, 2004. "Price Manipulation and Quasi-Arbitrage," Econometrica, Econometric Society, vol. 72(4), pages 1247-1275, 07.
- P. Weber & B. Rosenow, 2005. "Order book approach to price impact," Quantitative Finance, Taylor & Francis Journals, vol. 5(4), pages 357-364.
- 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.
- Robert Almgren, 2003. "Optimal execution with nonlinear impact functions and trading-enhanced risk," Applied Mathematical Finance, Taylor & Francis Journals, vol. 10(1), pages 1-18.
- Marc Potters & Jean-Philippe Bouchaud, 2002. "More statistical properties of order books and price impact," Science & Finance (CFM) working paper archive 0210710, Science & Finance, Capital Fund Management.
- 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.
- Jean-Philippe Bouchaud & Yuval Gefen & Marc Potters & Matthieu Wyart, 2003.
"Fluctuations and response in financial markets: the subtle nature of `random' price changes,"
Science & Finance (CFM) working paper archive
0307332, Science & Finance, Capital Fund Management.
- Jean-Philippe Bouchaud & Yuval Gefen & Marc Potters & Matthieu Wyart, 2003. "Fluctuations and response in financial markets: the subtle nature of `random' price changes," Papers cond-mat/0307332, arXiv.org, revised Aug 2003.
- 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.
- Potters, Marc & Bouchaud, Jean-Philippe, 2003. "More statistical properties of order books and price impact," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 324(1), pages 133-140.
- Bertsimas, Dimitris & Lo, Andrew W., 1998. "Optimal control of execution costs," Journal of Financial Markets, Elsevier, vol. 1(1), pages 1-50, April.
When requesting a correction, please mention this item's handle: RePEc:hal:journl:hal-00397652. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (CCSD)
If references are entirely missing, you can add them using this form.