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Portfolio liquidation under transient price impact -- theoretical solution and implementation with 100 NASDAQ stocks

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  • Ying Chen
  • Ulrich Horst
  • Hoang Hai Tran

Abstract

We derive an explicit solution for deterministic market impact parameters in the Graewe and Horst (2017) portfolio liquidation model. The model allows to combine various forms of market impact, namely instantaneous, permanent and temporary. We show that the solutions to the two benchmark models of Almgren and Chris (2001) and of Obizhaeva and Wang (2013) are obtained as special cases. We relate the different forms of market impact to the microstructure of limit order book markets and show how the impact parameters can be estimated from public market data. We investigate the numerical performance of the derived optimal trading strategy based on high frequency limit order books of 100 NASDAQ stocks that represent a range of market impact profiles. It shows the strategy achieves significant cost savings compared to the benchmark models of Almgren and Chris (2001) and of Obizhaeva and Wang (2013).

Suggested Citation

  • Ying Chen & Ulrich Horst & Hoang Hai Tran, 2019. "Portfolio liquidation under transient price impact -- theoretical solution and implementation with 100 NASDAQ stocks," Papers 1912.06426, arXiv.org.
    • Handle: RePEc:arx:papers:1912.06426
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    References listed on IDEAS

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    Cited by:

    1. Eduardo Abi Jaber & Eyal Neuman, 2022. "Optimal Liquidation with Signals: the General Propagator Case," Working Papers hal-03835948, HAL.
    2. Eyal Neuman & Yufei Zhang, 2023. "Statistical Learning with Sublinear Regret of Propagator Models," Papers 2301.05157, arXiv.org.
    3. Eduardo Abi Jaber & Eyal Neuman, 2022. "Optimal Liquidation with Signals: the General Propagator Case," Papers 2211.00447, arXiv.org.
    4. Michael Karpe, 2020. "An overall view of key problems in algorithmic trading and recent progress," Papers 2006.05515, arXiv.org.
    5. Marcel Nutz & Kevin Webster & Long Zhao, 2023. "Unwinding Stochastic Order Flow: When to Warehouse Trades," Papers 2310.14144, arXiv.org.
    6. Eyal Neuman & Moritz Vo{ss}, 2020. "Optimal Signal-Adaptive Trading with Temporary and Transient Price Impact," Papers 2002.09549, arXiv.org, revised Jan 2022.
    7. Tao Chen & Mike Ludkovski & Moritz Vo{ss}, 2022. "On Parametric Optimal Execution and Machine Learning Surrogates," Papers 2204.08581, arXiv.org, revised Oct 2023.

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