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PRICE IMPACT OF LARGE ORDERS USING HAWKES PROCESSES

Part of: Stochastic processes Mathematical economics

Published online by Cambridge University Press:  06 May 2019

L. R. AMARAL Open the ORCID record for L. R. AMARAL [Opens in a new window]  and
A. PAPANICOLAOU Open the ORCID record for A. PAPANICOLAOU [Opens in a new window]
L. R. AMARAL*
Affiliation:
Department of Finance and Risk Engineering, NYU Tandon School of Engineering, 6 MetroTech Center, Brooklyn, NY 11201, USA email lra286@nyu.edu, ap1345@nyu.edu
A. PAPANICOLAOU
Affiliation:
Department of Finance and Risk Engineering, NYU Tandon School of Engineering, 6 MetroTech Center, Brooklyn, NY 11201, USA email lra286@nyu.edu, ap1345@nyu.edu
*
✉lra286@nyu.edu
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Abstract

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We introduce a model for the execution of large market orders in limit order books, and use a linear combination of self-exciting Hawkes processes to model asset-price dynamics, with the addition of a price-impact function that is concave in the order size. A criterion for a general price-impact function is introduced, which is used to show how specification of a concave impact function affects order execution. Using our model, we examine the immediate and permanent impacts of large orders, analyse the potential for price manipulation, and show the effectiveness of the time-weighted average price strategy. Our model shows that price depends on the balance between the intensities of the Hawkes process, which can be interpreted as a dependence on order-flow imbalance.

Keywords

price-impact functionlimit order booksexecution of large ordersHawkes processes

MSC classification

Primary: 91B26: Market models (auctions, bargaining, bidding, selling, etc.)
Secondary: 60G55: Point processes 91B70: Stochastic models
Type
Research Article
Information
The ANZIAM Journal , Volume 61 , Issue 2 , April 2019 , pp. 161 - 194
Copyright
© 2019 Australian Mathematical Society 

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