Stochastic Liquidity as a Proxy for Nonlinear Price Impact

Author:

Muhle-Karbe Johannes1ORCID,Wang Zexin1,Webster Kevin1

Affiliation:

1. Department of Mathematics, Imperial College London, London SW7 1NE, United Kingdom

Abstract

For the “In This Issue” column: Trading costs play a central role in designing and implementing quantitative trading strategies. To quantify trading costs, optimal execution and trading algorithms rely on price impact models, such as the propagator model. Empirically, price impact is concave in trade sizes, leading to nonlinear models for which optimization problems are intractable and even qualitative properties, such as price manipulation, are poorly understood. This paper shows that, in the diffusion limit of small and frequent orders, the nonlinear model converges to a tractable linear model. In this high-frequency limit, a stochastic liquidity parameter approximates the original impact function’s nonlinearity. This allows us to derive simple formulas for optimal trading strategies and sharp conditions on market volumes to rule out price manipulation. A detailed empirical study using high-frequency limit-order data illustrates the practical performance of the theoretical results.

Publisher

Institute for Operations Research and the Management Sciences (INFORMS)

Subject

Management Science and Operations Research,Computer Science Applications

Cited by 3 articles. 订阅此论文施引文献 订阅此论文施引文献,注册后可以免费订阅5篇论文的施引文献,订阅后可以查看论文全部施引文献

同舟云学术

1.学者识别学者识别

2.学术分析学术分析

3.人才评估人才评估

"同舟云学术"是以全球学者为主线,采集、加工和组织学术论文而形成的新型学术文献查询和分析系统,可以对全球学者进行文献检索和人才价值评估。用户可以通过关注某些学科领域的顶尖人物而持续追踪该领域的学科进展和研究前沿。经过近期的数据扩容,当前同舟云学术共收录了国内外主流学术期刊6万余种,收集的期刊论文及会议论文总量共计约1.5亿篇,并以每天添加12000余篇中外论文的速度递增。我们也可以为用户提供个性化、定制化的学者数据。欢迎来电咨询!咨询电话:010-8811{复制后删除}0370

www.globalauthorid.com

TOP

Copyright © 2019-2024 北京同舟云网络信息技术有限公司
京公网安备11010802033243号  京ICP备18003416号-3