Portfolio liquidation under transient price impact -- theoretical solution and implementation with 100 NASDAQ stocks

TL;DR

This paper presents an explicit solution for portfolio liquidation considering various market impacts, demonstrating its effectiveness with real NASDAQ stock data and outperforming benchmark models in cost savings.

Contribution

It provides a new explicit solution for the Graewe and Horst model with combined market impacts, linking impact parameters to market microstructure and implementing it on real stock data.

Findings

The solution encompasses existing models as special cases.

Impact parameters can be estimated from public market data.

The strategy achieves significant cost savings on 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 Chris (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 Chris (2001) and of Obizhaeva and Wang (2013).