Optimal Trade Execution under Endogenous Order Flow

Arbeitspapier

We consider an optimal liquidation model in which an investor is required to execute meta-orders during intraday trading periods, and his trading activity triggers child orders and endogenously affects future order flow, both instantaneously and permanently. Under the assumptions of risk neutrality and deterministic constants of the impact parameters, we provide closed-form solutions and illustrate the relationship between trading strategies and feedback effects. The optimal trading strategy is of hyperbolic form if the feedback effect of current trading on future order flow is not too strong. If the feedback effect becomes too dominating, a cyclic strategy with possible beneficial round-trips may emerge. We set up an estimation framework so that parameter estimates can be made directly from public data and are consistent with the theoretical model. When implementing our model on 110 NASDAQ stocks, the empirical analysis shows that as the level of endogeneity increases, our strategy provides increasingly better performance than the commonly adopted trading strategy. The empirical analysis also shows that too strong feedback effects do not exist in practice, thus ruling out statistical arbitrage.

Angaben zum Objekt

• Sprache: Englisch

Verweise und Beziehungen

• Erschienen in: Series: Discussion Paper ; No. 368

Klassifikation und Themen

• Klassifikation: Wirtschaft
• Thema: liquidity risk ; optimal trading strategy ; portfolio liquidation ; Hawkes process

Beteiligte, Orts- und Zeitangaben

• Ereignis: Geistige Schöpfung
• (wer): Chen, Ying ; Tran, Hoang Hai ; Horst, Ulrich
• Ereignis: Veröffentlichung
• (wer): Ludwig-Maximilians-Universität München und Humboldt-Universität zu Berlin, Collaborative Research Center Transregio 190 - Rationality and Competition
• (wo): München und Berlin
• (wann): 2023

Weitere Informationen

• Handle: http://hdl.handle.net/10419/282060
• Letzte Aktualisierung: 10.03.2025, 11:44 MEZ