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arXiv · 0902.2516

Optimal Trade Execution in Illiquid Markets

Erhan Bayraktar·Mike Ludkovski
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Abstract

We study optimal trade execution strategies in financial markets with discrete order flow. The agent has a finite liquidation horizon and must minimize price impact given a random number of incoming trade counterparties. Assuming that the order flow $N$ is given by a Poisson process, we give a full analysis of the properties and computation of the optimal dynamic execution strategy. Extensions, whereby (a) $N$ is a fully-observed regime-switching Poisson process; and (b) $N$ is a Markov-modulated compound Poisson process driven by a hidden Markov chain, are also considered. We derive and compare the properties of the three cases and illustrate our results with computational examples.

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Erhan Bayraktar, Mike Ludkovski. 2009-02-15. Optimal Trade Execution in Illiquid Markets. https://doi.org/10.1111/j.1467-9965.2010.00446

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