High frequency trading in a Markov renewal model
We study an optimal high frequency trading problem within a market microstructure model aiming at a good compromise between accuracy and tractability. The stock price is modeled by a Markov Renewal Process (MRP), while market orders arrive in the limit order book via a point process correlated with the stock price, and taking into account the adverse selection risk. We apply stochastic control methods in this semi-Markov framework, and show how to reduce remarkably the complexity of the associated Hamilton-Jacobi-Bellman equation by suitable change of variables that exploits the specific symmetry of the problem. We then handle numerically the remaining part of the HJB equation, simplified into an integro-ordinary differential equation, by a bidimensional Euler scheme. Statistical procedures and numerical tests for computing the optimal limit order strategies illustrate our results.
|Date of creation:||27 Sep 2013|
|Note:||View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-00867113|
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- Erhan Bayraktar & Michael Ludkovski, 2014.
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