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OPTIMAL TRADE EXECUTION AND PRICE MANIPULATION IN ORDER BOOKS WITH TIME‐VARYING LIQUIDITY
Author(s) -
Fruth Antje,
Schöneborn Torsten,
Urusov Mikhail
Publication year - 2014
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/mafi.12022
Subject(s) - market liquidity , order book , portfolio , order (exchange) , trading strategy , economics , constant (computer programming) , limit (mathematics) , econometrics , financial market , computer science , mathematical economics , financial economics , monetary economics , mathematics , finance , mathematical analysis , programming language
In financial markets, liquidity is not constant over time but exhibits strong seasonal patterns. In this paper, we consider a limit order book model that allows for time‐dependent, deterministic depth and resilience of the book and determine optimal portfolio liquidation strategies. In a first model variant, we propose a trading‐dependent spread that increases when market orders are matched against the order book. In this model, no price manipulation occurs and the optimal strategy is of the wait region/buy region type often encountered in singular control problems. In a second model, we assume that there is no spread in the order book. Under this assumption, we find that price manipulation can occur, depending on the model parameters. Even in the absence of classical price manipulation, there may be transaction triggered price manipulation. In specific cases, we can state the optimal strategy in closed form.