Optimal execution strategies in limit order books with general shape functions

Abstract : We consider optimal execution strategies for block market orders placed in a limit order book (LOB). We build on the resilience model proposed by Obizhaeva and Wang (2005) but allow for a general shape of the LOB defined via a given density function. Thus, we can allow for empirically observed LOB shapes and obtain a nonlinear price impact of market orders. We distinguish two possibilities for modeling the resilience of the LOB after a large market order: the exponential recovery of the number of limit orders, i.e., of the volume of the LOB, or the exponential recovery of the bid-ask spread. We consider both of these resilience modes and, in each case, derive explicit optimal execution strategies in discrete time. Applying our results to a block-shaped LOB, we obtain a new closed-form representation for the optimal strategy, which explicitly solves the recursive scheme given in Obizhaeva and Wang (2005). We also provide some evidence for the robustness of optimal strategies with respect to the choice of the shape function and the resilience-type.
Document type :
Journal articles
Complete list of metadatas

Cited literature [21 references]  Display  Hide  Download

Contributor : Aurélien Alfonsi <>
Submitted on : Wednesday, February 3, 2010 - 2:44:46 PM
Last modification on : Monday, November 18, 2019 - 3:48:34 PM
Long-term archiving on : Thursday, September 23, 2010 - 5:56:27 PM


Files produced by the author(s)




Aurélien Alfonsi, Antje Fruth, Alexander Schied. Optimal execution strategies in limit order books with general shape functions. Quantitative Finance, Taylor & Francis (Routledge), 2010, 10 (2), pp.143-157. ⟨10.1080/14697680802595700⟩. ⟨hal-00166969v3⟩



Record views


Files downloads