Finance and Stochastics· 2026Q1
Optimal execution and speculation with trade signals
- 1citations
- Q1SCImago
- 2026year
Short summary
A new price impact model shows traders can enhance execution and speculative strategies by learning from a short-term signal process that predicts order flow changes.
AI-generated from the title and abstract; the full text is not read.
Key points
- Proposes a price impact model where price changes are driven by order flow and a mean-reverting liquidity process.
- Introduces a short-term signal process to predict imminent changes in order flow.
- Uses a novel version of Marcus-type SDEs to model market dynamics when trader orders coincide with others.
- Numerically solves the HJB equation to show how signals improve trade execution and speculative strategies.
AI-generated from the title and abstract; the full text is not read.
Abstract
Abstract We propose a price impact model where changes in prices are purely driven by the order flow in the market. The stochastic price impact of market orders and the arrival rates of limit and market orders are functions of the market liquidity process which reflects the balance of the demand and supply of liquidity. Limit and market orders mutually excite each other so that the liquidity is mean-reverting. We use the theory of Meyer $\sigma $ σ -fields to introduce a short-term signal process from which a trader learns about imminent changes in order flow. Her trades impact the market through the same mechanism as other orders. With a novel version of Marcus-type SDEs, we efficiently describe the intricate timing of market dynamics at moments when her orders coincide with orders issued by others. In this setting, we examine an optimal execution problem and derive the Hamilton–Jacobi–Bellman (HJB) equation for the value function of the trader. The HJB equation is solved numerically, and we illustrate how the trader uses the signals to enhance the performance of execution problems and to execute speculative strategies.
The authors' abstract, as published at the source. Finance and Stochastics, 2026 · DOI ↗
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Field: Economics and Econometrics
Economics and EconometricsEconomics, Econometrics and Finance