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Dynamic optimal execution in a mixed-market-impact Hawkes price model

Aurélien Alfonsi 1, 2 Pierre Blanc 1, 2
2 MATHRISK - Mathematical Risk Handling
UPEM - Université Paris-Est Marne-la-Vallée, ENPC - École des Ponts ParisTech, Inria de Paris
Abstract : We study a linear price impact model including other liquidity takers, whose flow of orders either follows a Poisson or a Hawkes process. The optimal execution problem is solved explicitly in this context, and the closed-formula optimal strategy describes in particular how one should react to the orders of other traders. This result enables us to discuss the viability of the market. It is shown that Poissonian arrivals of orders lead to quite robust Price Manipulation Strategies in the sense of Huberman and Stanzl. Instead, a particular set of conditions on the Hawkes model balances the self-excitation of the order flow with the resilience of the price, excludes Price Manipulation Strategies and gives some market stability.
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Submitted on : Tuesday, June 9, 2015 - 2:49:16 PM
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Aurélien Alfonsi, Pierre Blanc. Dynamic optimal execution in a mixed-market-impact Hawkes price model. Finance and Stochastics, Springer Verlag (Germany), 2016, ⟨10.1007/s00780-015-0282-y⟩. ⟨hal-00971369v2⟩



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