Optimal trade execution under endogenous order flow
Ying Chen, Hoang Hai Tran, Ulrich Horst
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.
Year of publication: |
[2023]
|
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Authors: | Chen, Ying ; Hoang Hai Tran ; Horst, Ulrich |
Publisher: |
[München] : Collaborative Research Center Transregio 190 |
Subject: | liquidity risk | optimal trading strategy | portfolio liquidation | Hawkes process | Theorie | Theory | Portfolio-Management | Portfolio selection | Liquidität | Liquidity | Wertpapierhandel | Securities trading | Marktmikrostruktur | Market microstructure | Anlageverhalten | Behavioural finance |
Saved in:
freely available
Extent: | 1 Online-Ressource (circa 41 Seiten) Illustrationen |
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Series: | Discussion paper. - München : Collaborative Research Center Transregio 190, ZDB-ID 2881680-8. - Vol. no. 368 (January 20, 2023) |
Type of publication: | Book / Working Paper |
Type of publication (narrower categories): | Graue Literatur ; Non-commercial literature ; Arbeitspapier ; Working Paper |
Language: | English |
Other identifiers: | hdl:10419/282060 [Handle] |
Source: | ECONIS - Online Catalogue of the ZBW |
Persistent link: https://www.econbiz.de/10014476807
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