Optimum Liquidation Problem Associated with the Poisson Cluster Process

A. Sadoghi and J. Vecer

Papers from arXiv.org

Abstract: In this research, we develop a trading strategy for the discrete-time optimal liquidation problem of large order trading with different market microstructures in an illiquid market. In this framework, the flow of orders can be viewed as a point process with stochastic intensity. We model the price impact as a linear function of a self-exciting dynamic process. We formulate the liquidation problem as a discrete-time Markov Decision Processes, where the state process is a Piecewise Deterministic Markov Process (PDMP). The numerical results indicate that an optimal trading strategy is dependent on characteristics of the market microstructure. When no orders above certain value come the optimal solution takes offers in the lower levels of the limit order book in order to prevent not filling of orders and facing final inventory costs.

Date: 2015-07, Revised 2015-12
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