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Optimal liquidation under indirect price impact with propagator

Author

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  • Dupret, Jean-Loup

    (Université catholique de Louvain, LIDAM/ISBA, Belgium)

  • Hainaut, Donatien

    (Université catholique de Louvain, LIDAM/ISBA, Belgium)

Abstract

We propose in this paper a new framework of optimal liquidation strategies for a trader seeking to liquidate his large inventory based on a jump-dependent price impact model with propagator. This new jump-dependent price impact model allows to best reproduce the empirical direct and indirect effects of market orders on the transaction price. More precisely, different choices of propagators are proposed and their implications in terms of temporary, permanent and transient impacts on the transaction price are discussed. For each choice of such kernels, we formulate the most relevant optimal liquidation problem faced by the trader, derive explicitly the related Hamilton-Jacobi-Bellman equation and solve it numerically. Moreover, we show how to extend our price impact model so to include the possibility for the trader to also use limit orders. We hence manage in this paper to propose an alternative more realistic and flexible description of the order book’s dynamic and to make a bridge between high-frequency price models and optimal liquidation problems.

Suggested Citation

  • Dupret, Jean-Loup & Hainaut, Donatien, 2023. "Optimal liquidation under indirect price impact with propagator," LIDAM Discussion Papers ISBA 2023012, Université catholique de Louvain, Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA).
    • Handle: RePEc:aiz:louvad:2023012
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Optimal liquidation ; HJB equation ; Price impact model ; Market impact ; High-frequency trading;
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