Portfolio Liquidation Under Transient Price Impact – Theoretical Solution and Implementation With 100 NASDAQ Stocks

Abstract

We derive an explicit solution for deterministic market impact parameters in the Graewe and Horst (2017) portfolio liquidation model. The model allows to combine various forms of market impact, namely instantaneous, permanent and temporary. We show that the solutions to the two benchmark models of Almgren and Chriss (2001) and of Obizhaeva and Wang (2013) are obtained as special cases. We relate the different forms of market impact to the microstructure of limit order book markets and show how the impact parameters can be estimated from public market data. We investigate the numerical performance of the derived optimal trading strategy based on high frequency limit order books of 100 NASDAQ stocks that represent a range of market impact profiles. It shows the strategy achieves significant cost savings compared to the benchmark models of Almgren and Chriss (2001) and Obizhaeva and Wang (2013) .

An overall view of key problems in algorithmic trading and recent progress

“…However, other papers show the limits of the linear hypothesis in the transient price impact model by studying the slow decay of impact in equity markets [12]. Recent work presents a portfolio liquidation problem of 100 NASDAQ stocks under transient price impact [13].…”