Solvability of Differential Riccati Equations and Applications to Algorithmic Trading with Signals

Fay\c{c}al Drissi

Papers from arXiv.org

Abstract: We study a differential Riccati equation (DRE) with indefinite matrix coefficients, which arises in a wide class of practical problems. We show that the DRE solves an associated control problem, which is key to provide existence and uniqueness of a solution. As an application, we solve two algorithmic trading problems in which the agent adopts a constant absolute risk-aversion (CARA) utility function, and where the optimal strategies use signals and past observations of prices to improve their performance. First, we derive a multi-asset market making strategy in over-the-counter markets, where the market maker uses an external trading venue to hedge risk. Second, we derive an optimal trading strategy that uses prices and signals to learn the drift in the asset prices.

Date: 2022-02, Revised 2023-08
New Economics Papers: this item is included in nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Published in Applied Mathematical Finance, 29:6, 457-493, DOI: 10.1080/1350486X.2023.2241130

Downloads: (external link)
http://arxiv.org/pdf/2202.07478 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:2202.07478

Access Statistics for this paper

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