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High-Resilience Limits of Block-Shaped Order Books

Author

Listed:
  • Jan KALLSEN

    (Munich University of Technology)

  • Johannes MUHLE-KARBE

    (ETH Zurich and Swiss Finance Institute)

Abstract

We show that wealth processes in the block-shaped order book model of Obizhaeva/Wang converge to their counterparts in the reduced-form model proposed by Almgren/Chriss, as the resilience of the order book tends to infinity. As an application of this limit theorem, we explain how to reduce portfolio choice in highly-resilient Obizhaeva/Wang models to the corresponding problem in an Almgren/Chriss setup with small quadratic trading costs.

Suggested Citation

  • Jan KALLSEN & Johannes MUHLE-KARBE, 2014. "High-Resilience Limits of Block-Shaped Order Books," Swiss Finance Institute Research Paper Series 14-72, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1472
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    File URL: http://ssrn.com/abstract=2501362
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    Cited by:

    1. Ibrahim Ekren & Johannes Muhle-Karbe, 2017. "Portfolio Choice with Small Temporary and Transient Price Impact," Papers 1705.00672, arXiv.org, revised Apr 2020.
    2. David Evangelista & Yuri Saporito & Yuri Thamsten, 2022. "Price formation in financial markets: a game-theoretic perspective," Papers 2202.11416, arXiv.org.
    3. Erhan Bayraktar & Alexander Munk, 2017. "Mini-Flash Crashes, Model Risk, and Optimal Execution," Papers 1705.09827, arXiv.org, revised Aug 2018.

    More about this item

    Keywords

    Limit order books; price impact; high-resilience limit;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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