Optimal signal-adaptive trading with temporary and transient price impact
File(s)
Accepted version
Author(s)
Neumann, Eyal
Moritz, Voss
Type
Journal Article
Abstract
We study optimal liquidation in the presence of linear temporary and transient price impact along with taking into account a general price predicting
finite-variation signal. We formulate this problem as minimization of a cost-risk
functional over a class of absolutely continuous and signal-adaptive strategies.
The stochastic control problem is solved by following a probabilistic and convex
analytic approach. We show that the optimal trading strategy is given by a
system of four coupled forward-backward SDEs, which can be solved explicitly.
Our results reveal how the induced transient price distortion provides together
with the predictive signal an additional predictor about future price changes.
As a consequence, the optimal signal-adaptive trading rate trades off exploiting
the predictive signal against incurring the transient displacement of the execution price from its unaffected level. This answers an open question from Lehalle
and Neuman [29] as we show how to derive the unique optimal signal-adaptive
liquidation strategy when price impact is not only temporary but also transient.
finite-variation signal. We formulate this problem as minimization of a cost-risk
functional over a class of absolutely continuous and signal-adaptive strategies.
The stochastic control problem is solved by following a probabilistic and convex
analytic approach. We show that the optimal trading strategy is given by a
system of four coupled forward-backward SDEs, which can be solved explicitly.
Our results reveal how the induced transient price distortion provides together
with the predictive signal an additional predictor about future price changes.
As a consequence, the optimal signal-adaptive trading rate trades off exploiting
the predictive signal against incurring the transient displacement of the execution price from its unaffected level. This answers an open question from Lehalle
and Neuman [29] as we show how to derive the unique optimal signal-adaptive
liquidation strategy when price impact is not only temporary but also transient.
Date Issued
2022-05-05
Date Acceptance
2021-12-14
Citation
SIAM Journal on Financial Mathematics, 2022, 13 (2), pp.551-575
ISSN
1945-497X
Publisher
Society for Industrial and Applied Mathematics
Start Page
551
End Page
575
Journal / Book Title
SIAM Journal on Financial Mathematics
Volume
13
Issue
2
Copyright Statement
© 2022 Society for Industrial and Applied Mathematics
Identifier
https://epubs.siam.org/doi/abs/10.1137/20M1375486
Subjects
0102 Applied Mathematics
0104 Statistics
1502 Banking, Finance and Investment
Publication Status
Published
Date Publish Online
2022-05-05