OPTIMAL TRADING STRATEGIES WITH LIMIT ORDERS

Rossella Agliardi () and Ramazan Gencay
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Rossella Agliardi: Department of Mathematics, University of Bologna, viale Filopanti n.5, 40126 Bologna, Italy

International Journal of Theoretical and Applied Finance (IJTAF), 2017, vol. 20, issue 01, 1-16

Abstract: A model is proposed to study the risk management problem of designing optimal trading strategies in a limit order book. The execution of limit orders is uncertain, which leads to a stochastic control problem. In contrast to previous literature, we allow the agents to choose both the quotes and the sizes of their submitted orders. Attention is paid to how the trading strategy is affected by an order book’s characteristics, market volatility and the trader’s risk attitude. We prescribe an optimal splitting of the order size for the trades with limit orders, while the existing literature offers a solution to this problem with market orders, and, at the same time, we provide guidelines to optimally place orders further behind the best price or to (re)position them more aggressively. Thus this paper is an attempt towards a more realistic modeling of optimal liquidation throughout limit orders.

Keywords: Optimal trade execution; limit orders; stochastic dynamic programming (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1142/S0219024917500054

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