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Optimal liquidation strategy for cryptocurrency marketplaces using stochastic control

Author

Listed:
  • Kubo, Kenji
  • Nakagawa, Kei
  • Mizukami, Daiki
  • Acharya, Dipesh

Abstract

The cryptocurrency marketplace provides liquidity receiving orders from investors. This requires managing the appropriate inventory risk. An optimal liquidation strategy based on stochastic control has been proposed for such inventory risk management problems of FX dealers. However, the cryptocurrency market has different characteristics than the FX market. Therefore, we propose an optimal liquidation strategy based on stochastic control that considers the characteristics of the cryptocurrency marketplace. We also perform an empirical study using the trading data of a cryptocurrency marketplace. We show that order bias affects the optimal liquidation strategy, and our proposed method is more effective than simple liquidation strategies.

Suggested Citation

  • Kubo, Kenji & Nakagawa, Kei & Mizukami, Daiki & Acharya, Dipesh, 2023. "Optimal liquidation strategy for cryptocurrency marketplaces using stochastic control," Finance Research Letters, Elsevier, vol. 53(C).
    • Handle: RePEc:eee:finlet:v:53:y:2023:i:c:s1544612323000132
    DOI: 10.1016/j.frl.2023.103639
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    References listed on IDEAS

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