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

Aurélien Alfonsi () and Pierre Blanc
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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

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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.

Date: 2016-01
New Economics Papers: this item is included in nep-mst
Note: View the original document on HAL open archive server: https://enpc.hal.science/hal-00971369v2
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Citations: View citations in EconPapers (21)

Published in Finance and Stochastics, 2016, ⟨10.1007/s00780-015-0282-y⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-00971369

DOI: 10.1007/s00780-015-0282-y

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