Optimal Execution in Illiquid Market with the Absence of Price Manipulation

Seiya Kuno; Masamitsu Ohnishi

doi:10.4236/jmf.2015.51001

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Journal of Mathematical Finance > Vol.5 No.1, February 2015

Optimal Execution in Illiquid Market with the Absence of Price Manipulation ()

Seiya Kuno¹, Masamitsu Ohnishi²

¹Center for the Study of Finance and Insurance, Osaka University, Osaka, Japan.
²Graduate School of Economics, Osaka University, Osaka, Japan.

DOI: 10.4236/jmf.2015.51001 PDF HTML XML 3,478 Downloads 4,123 Views Citations

Abstract

This article shows the execution performance of the risk-averse institutional trader with constant absolute risk aversion (CARA) type utility by using the condition of no price manipulation defined in the risk neutral sense. From two linear price impact models both satisfying that condition, we have derived the unique explicit optimal execution strategy calculated backwardly with dynamic programming equations. And our study shows that the optimal execution strategy exists in the static class. The derived solution can be decomposed into mainly two components, each giving an explanation of the property of optimal execution volume. Moreover we propose two conditions in order to compare the performance of these two price models, and illustrate that the performances of the two models are surprisingly different under certain conditions.

Keywords

Optimal Execution, Price Manipulation, Algorithmic Trading

Share and Cite:

Kuno, S. and Ohnishi, M. (2015) Optimal Execution in Illiquid Market with the Absence of Price Manipulation. Journal of Mathematical Finance, 5, 1-14. doi: 10.4236/jmf.2015.51001.

Conflicts of Interest

The authors declare no conflicts of interest.

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