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Optimal Execution in a Multiplayer Model of Transient Price Impact

Elias Strehle

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Abstract: Trading algorithms that execute large orders are susceptible to exploitation by order anticipation strategies. This paper studies the influence of order anticipation strategies in a multi-investor model of optimal execution under transient price impact. Existence and uniqueness of a Nash equilibrium is established under the assumption that trading incurs quadratic transaction costs. A closed-form representation of the Nash equilibrium is derived for exponential decay kernels. With this representation, it is shown that while order anticipation strategies raise the execution costs of a large order significantly, they typically do not cause price overshooting in the sense of Brunnermeier and Pedersen.

Date: 2016-09, Revised 2019-03
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Published in Market Microstructure and Liquidity, 3(03n04), p.1850007

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