Liquidation with Self-Exciting Price Impact

Thomas Cayé and Johannes Muhle-Karbe
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Thomas Cayé: Dublin City University - School of Mathematical Sciences
Johannes Muhle-Karbe: Imperial College London - Department of Mathematics

No 14-74, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We study optimal execution with "self-exciting" price impact, where persistent trades not only incur price impact but also increase the execution costs for successive orders. This model is motivated by an equilibrium between fundamental sellers, market makers, and end users. For risk-neutral investors, it leads to faster initial trading compared to the constant execution rate of Bertsimas and Lo (1998). For risk-averse liquidation as in Almgren and Chriss (1999, 2001) or Huberman and Stanzl (2005), self-excitement has a moderating effect: slow liquidation is sped up, whereas fast schedules are slowed down.

Keywords: optimal liquidation; price impact; self-excitement; risk aversion (search for similar items in EconPapers)
JEL-codes: G11 (search for similar items in EconPapers)
Pages: 12 pages
Date: 2014-12
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1474

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