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OPTIMAL TRADE EXECUTION IN ILLIQUID MARKETS
Author(s) -
Bayraktar Erhan,
Ludkovski Michael
Publication year - 2011
Publication title -
mathematical finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.98
H-Index - 81
eISSN - 1467-9965
pISSN - 0960-1627
DOI - 10.1111/j.1467-9965.2010.00446.x
Subject(s) - poisson distribution , order (exchange) , computation , computer science , poisson process , process (computing) , mathematical optimization , flow (mathematics) , compound poisson process , markov process , time horizon , financial market , discrete time and continuous time , mathematical economics , econometrics , economics , mathematics , finance , algorithm , statistics , geometry , operating system
We study optimal trade execution strategies in financial markets with discrete order flow. The agent has a finite liquidation horizon and must minimize price impact given a random number of incoming trade counterparties. Assuming that the order flow N is given by a Poisson process, we give a full analysis of the properties and computation of the optimal dynamic execution strategy. Extensions, whereby N is a Markov‐modulated compound Poisson process are also considered. We derive and compare the properties of the various cases and illustrate our results with computational examples.