C\`adl\`ag semimartingale strategies for optimal trade execution in stochastic order book models

Julia Ackermann, Thomas Kruse and Mikhail Urusov

Papers from arXiv.org

Abstract: We analyze an optimal trade execution problem in a financial market with stochastic liquidity. To this end we set up a limit order book model in continuous time. Both order book depth and resilience are allowed to evolve randomly in time. We allow for trading in both directions and for c\`adl\`ag semimartingales as execution strategies. We derive a quadratic BSDE that under appropriate assumptions characterizes minimal execution costs and identify conditions under which an optimal execution strategy exists. We also investigate qualitative aspects of optimal strategies such as, e.g., appearance of strategies with infinite variation or existence of block trades and discuss connections with the discrete-time formulation of the problem. Our findings are illustrated in several examples.

Date: 2020-06, Revised 2021-07
New Economics Papers: this item is included in nep-mst and nep-ore
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