2020/02/21 by Eyal Neuman, Neuman, Eyal, Moritz Voß +1 · 2 citations
Economics, Econometrics and Finance · #60H30 #91G80 #93E20 #Economic theories and models #FOS: Economics and business #FOS: Mathematics #Financial Markets and Investment Strategies #Probability (math.PR) #Stochastic processes and financial applications #Trading and Market Microstructure (q-fin.TR)
paper · pdf · doi:10.48550/arxiv.2002.09549
openalex publication_date 2020/02/21 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28
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.