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Extension and calibration of a Hawkes-based optimal execution model

Author

Listed:
  • Aurélien Alfonsi

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

Abstract

We provide some theoretical extensions and a calibration protocol for our former dynamic optimal execution model. The Hawkes parameters and the propagator are estimated independently on financial data from stocks of the CAC40. Interestingly, the propagator exhibits a smoothly decaying form with one or two dominant time scales, but only so after a few seconds that the market needs to adjust after a large trade. Motivated by our estimation results, we derive the optimal execution strategy for a multi-exponential Hawkes kernel and backtest it on the data for round trips. We find that the strategy is profitable on average when trading at the midprice, which is in accordance with violated martingale conditions. However, in most cases, these profits vanish when we take bid-ask costs into account.

Suggested Citation

  • Aurélien Alfonsi & Pierre Blanc, 2016. "Extension and calibration of a Hawkes-based optimal execution model," Post-Print hal-01169686, HAL.
    • Handle: RePEc:hal:journl:hal-01169686
    DOI: 10.1142/S2382626616500052
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    Cited by:

    1. Antoine Fosset & Jean-Philippe Bouchaud & Michael Benzaquen, 2020. "Non-parametric Estimation of Quadratic Hawkes Processes for Order Book Events," Working Papers hal-02998555, HAL.
    2. Antoine Fosset & Jean-Philippe Bouchaud & Michael Benzaquen, 2021. "Non-parametric Estimation of Quadratic Hawkes Processes for Order Book Events," Post-Print hal-02998555, HAL.
    3. Antoine Fosset & Jean-Philippe Bouchaud & Michael Benzaquen, 2020. "Non-parametric Estimation of Quadratic Hawkes Processes for Order Book Events," Papers 2005.05730, arXiv.org.

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