The self-financing equation in limit order book markets

René Carmona () and Kevin Webster
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René Carmona: Princeton University

Finance and Stochastics, 2019, vol. 23, issue 3, No 8, 729-759

Abstract: Abstract The goal of this paper is to present a mathematical framework for trading on a limit order book, including its associated transaction costs, and to propose continuous-time equations which generalise the self-financing relationships of frictionless markets. These equations naturally differentiate between trading via limit and via market orders, as they include a price impact or adverse selection constraint. We briefly mention several possible applications, including hedging European options with limit orders, to illustrate their impact and how they can be used to the benefit of low-frequency traders. Two appendices include empirical evidence for facts which are not universally recognised in the current literature on the subject.

Keywords: Self-financing equation; Limit order book markets; 91G80; 91G20 (search for similar items in EconPapers)
JEL-codes: C6 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (14)

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DOI: 10.1007/s00780-019-00398-z

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