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Optimal trading without optimal control

Author

Listed:
  • Bastien Baldacci
  • Jerome Benveniste
  • Gordon Ritter

Abstract

A hypothetical risk-neutral agent who trades to maximize the expected profit of the next trade will approximately exhibit long-term optimal behavior as long as this agent uses the vector $p = \nabla V (t, x)$ as effective microstructure alphas, where V is the Bellman value function for a smooth relaxation of the problem. Effective microstructure alphas are the steepest-ascent direction of V , equal to the generalized momenta in a dual Hamiltonian formulation. This simple heuristics has wide-ranging practical implications; indeed, most utility-maximization problems that require implementation via discrete limit-order-book markets can be treated by our method.

Suggested Citation

  • Bastien Baldacci & Jerome Benveniste & Gordon Ritter, 2020. "Optimal trading without optimal control," Papers 2012.12945, arXiv.org.
    • Handle: RePEc:arx:papers:2012.12945
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    File URL: http://arxiv.org/pdf/2012.12945
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    References listed on IDEAS

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