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Dynamic optimal execution in a mixed-market-impact Hawkes price model

Author

Listed:
  • Aurélien Alfonsi

    (CERMICS - Centre d'Enseignement et de Recherche en Mathématiques et Calcul Scientifique - ENPC - École nationale des ponts et chaussées, MATHRISK - Mathematical Risk Handling - UPEM - Université Paris-Est Marne-la-Vallée - ENPC - École nationale des ponts et chaussées - Centre Inria de Paris - Inria - Institut National de Recherche en Informatique et en Automatique)

  • Pierre Blanc

    (CERMICS - Centre d'Enseignement et de Recherche en Mathématiques et Calcul Scientifique - ENPC - École nationale des ponts et chaussées, MATHRISK - Mathematical Risk Handling - UPEM - Université Paris-Est Marne-la-Vallée - ENPC - École nationale des ponts et chaussées - Centre Inria de Paris - Inria - Institut National de Recherche en Informatique et en Automatique)

Abstract

We study a linear price impact model including other liquidity takers, whose flow of orders either follows a Poisson or a Hawkes process. The optimal execution problem is solved explicitly in this context, and the closed-formula optimal strategy describes in particular how one should react to the orders of other traders. This result enables us to discuss the viability of the market. It is shown that Poissonian arrivals of orders lead to quite robust Price Manipulation Strategies in the sense of Huberman and Stanzl. Instead, a particular set of conditions on the Hawkes model balances the self-excitation of the order flow with the resilience of the price, excludes Price Manipulation Strategies and gives some market stability.

Suggested Citation

  • Aurélien Alfonsi & Pierre Blanc, 2016. "Dynamic optimal execution in a mixed-market-impact Hawkes price model," Post-Print hal-00971369, HAL.
    • Handle: RePEc:hal:journl:hal-00971369
    DOI: 10.1007/s00780-015-0282-y
    Note: View the original document on HAL open archive server: https://enpc.hal.science/hal-00971369v2
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    References listed on IDEAS

    as
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