Optimal Trade Execution in Illiquid Markets

Erhan Bayraktar and Mike Ludkovski

Papers from arXiv.org

Abstract: We study optimal trade execution strategies in financial markets with discrete order flow. The agent has a finite liquidation horizon and must minimize price impact given a random number of incoming trade counterparties. Assuming that the order flow $N$ is given by a Poisson process, we give a full analysis of the properties and computation of the optimal dynamic execution strategy. Extensions, whereby (a) $N$ is a fully-observed regime-switching Poisson process; and (b) $N$ is a Markov-modulated compound Poisson process driven by a hidden Markov chain, are also considered. We derive and compare the properties of the three cases and illustrate our results with computational examples.

Date: 2009-02
References: View complete reference list from CitEc
Citations: View citations in EconPapers (16)

Published in Mathematical Finance 21(4), pp. 681-701, 2011

Downloads: (external link)
http://arxiv.org/pdf/0902.2516 Latest version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:0902.2516

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().