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arXiv · 2004.10951

Optimal execution with liquidity risk in a diffusive order book market

Hyoeun Lee·Kiseop Lee
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Abstract

We study the optimal order placement strategy with the presence of a liquidity cost. In this problem, a stock trader wishes to clear her large inventory by a predetermined time horizon $T$. A trader uses both limit and market orders, and a large market order faces an adverse price movement caused by the liquidity risk. First, we study a single period model where the trader places a limit order and/or a market order at the beginning. We show the behavior of optimal amount of market order, $m^*$, and optimal placement of limit order, $y^*$, under different market conditions. Next, we extend it to a multi-period model, where the trader makes sequential decisions of limit and market orders at multiple time points.

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Hyoeun Lee, Kiseop Lee. 2020-04-23. Optimal execution with liquidity risk in a diffusive order book market. https://arxiv.org/abs/2004.10951

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