Optimal execution and price manipulations in time-varying limit order books

Aurélien Alfonsi (1, 2) , José Infante Acevedo (1)

1 CERMICS - Centre d'Enseignement et de Recherche en Mathématiques et Calcul Scientifique
2 MATHRISK - Mathematical Risk handling

This paper focuses on an extension of the Limit Order Book (LOB) model with general shape introduced by Alfonsi, Fruth and Schied. Here, the additional feature allows a time-varying LOB depth. We solve the optimal execution problem in this framework for both discrete and continuous time strategies. This gives in particular sufficient conditions to exclude Price Manipulations in the sense of Huberman and Stanzl or Transaction-Triggered Price Manipulations (see Alfonsi, Schied and Slynko). These conditions give interesting qualitative insights on how market makers may create or not price manipulations.

Domaines: Économie et finance quantitative [q-fin]; Microstructure des marchés [q-fin.TR]; Mathématiques [math]; Optimisation et contrôle [math.OC]; Mathématiques [math]; Probabilités [math.PR]

Aurélien Alfonsi, José Infante Acevedo. Optimal execution and price manipulations in time-varying limit order books. Applied Mathematical Finance, 2014, http://www.tandfonline.com/doi/abs/10.1080/1350486X.2013.845471#.VMpSGGNxNhg. ⟨10.1080/1350486X.2013.845471⟩. ⟨hal-00687193⟩