Optimal execution strategies in limit order books with general shape functions

Aur\'elien Alfonsi, Antje Fruth and Alexander Schied
Additional contact information
Aur\'elien Alfonsi: CERMICS

Papers from arXiv.org

Abstract: We consider optimal execution strategies for block market orders placed in a limit order book (LOB). We build on the resilience model proposed by Obizhaeva and Wang (2005) but allow for a general shape of the LOB defined via a given density function. Thus, we can allow for empirically observed LOB shapes and obtain a nonlinear price impact of market orders. We distinguish two possibilities for modeling the resilience of the LOB after a large market order: the exponential recovery of the number of limit orders, i.e., of the volume of the LOB, or the exponential recovery of the bid-ask spread. We consider both of these resilience modes and, in each case, derive explicit optimal execution strategies in discrete time. Applying our results to a block-shaped LOB, we obtain a new closed-form representation for the optimal strategy, which explicitly solves the recursive scheme given in Obizhaeva and Wang (2005). We also provide some evidence for the robustness of optimal strategies with respect to the choice of the shape function and the resilience-type.

Date: 2007-08, Revised 2010-02
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (177)

Downloads: (external link)
http://arxiv.org/pdf/0708.1756 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:0708.1756

Access Statistics for this paper

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