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Article: Trading Strategy with stochastic volatility in a limit order book market

TitleTrading Strategy with stochastic volatility in a limit order book market
Authors
KeywordsLimit order book (LOB)
Dynamic programming (DP)
Hamilton–Jacobi–Bellman (HJB) equation
Market impact
Stochastic volatility (SV) model
Issue Date2020
PublisherSpringer-Verlag Italia Srl. The Journal's web site is located at https://www.springer.com/journal/10203
Citation
Decisions in Economics and Finance, 2020, v. 43 n. 1, p. 277-301 How to Cite?
AbstractIn this paper, we employ the Heston stochastic volatility model to describe the stock’s volatility and apply the model to derive and analyze trading strategies for dealers in a security market with price discovery. The problem is formulated as a stochastic optimal control problem, and the controlled state process is the dealer’s mark-to-market wealth. Dealers in the security market can optimally determine their ask and bid quotes on the underlying stocks continuously over time. Their objective is to maximize an expected profit from transactions with a penalty proportional to the variance of cumulative inventory cost. We provide an approximate, analytically tractable solution to the stochastic control problem. Numerical experiments are given to illustrate the effects of various parameters on the performances of trading strategies.
Persistent Identifierhttp://hdl.handle.net/10722/300668
ISSN
2020 SCImago Journal Rankings: 0.272

 

DC FieldValueLanguage
dc.contributor.authorYANG, Q-
dc.contributor.authorChing, WK-
dc.contributor.authorGu, J-
dc.contributor.authorSiu, TK-
dc.date.accessioned2021-06-18T14:55:17Z-
dc.date.available2021-06-18T14:55:17Z-
dc.date.issued2020-
dc.identifier.citationDecisions in Economics and Finance, 2020, v. 43 n. 1, p. 277-301-
dc.identifier.issn1593-8883-
dc.identifier.urihttp://hdl.handle.net/10722/300668-
dc.description.abstractIn this paper, we employ the Heston stochastic volatility model to describe the stock’s volatility and apply the model to derive and analyze trading strategies for dealers in a security market with price discovery. The problem is formulated as a stochastic optimal control problem, and the controlled state process is the dealer’s mark-to-market wealth. Dealers in the security market can optimally determine their ask and bid quotes on the underlying stocks continuously over time. Their objective is to maximize an expected profit from transactions with a penalty proportional to the variance of cumulative inventory cost. We provide an approximate, analytically tractable solution to the stochastic control problem. Numerical experiments are given to illustrate the effects of various parameters on the performances of trading strategies.-
dc.languageeng-
dc.publisherSpringer-Verlag Italia Srl. The Journal's web site is located at https://www.springer.com/journal/10203-
dc.relation.ispartofDecisions in Economics and Finance-
dc.rightsAccepted Manuscript (AAM) This is a post-peer-review, pre-copyedit version of an article published in [insert journal title]. The final authenticated version is available online at: https://doi.org/[insert DOI]-
dc.subjectLimit order book (LOB)-
dc.subjectDynamic programming (DP)-
dc.subjectHamilton–Jacobi–Bellman (HJB) equation-
dc.subjectMarket impact-
dc.subjectStochastic volatility (SV) model-
dc.titleTrading Strategy with stochastic volatility in a limit order book market-
dc.typeArticle-
dc.identifier.emailChing, WK: wching@hku.hk-
dc.identifier.authorityChing, WK=rp00679-
dc.description.naturelink_to_subscribed_fulltext-
dc.identifier.doi10.1007/s10203-020-00278-8-
dc.identifier.scopuseid_2-s2.0-85081903020-
dc.identifier.hkuros323021-
dc.identifier.volume43-
dc.identifier.issue1-
dc.identifier.spage277-
dc.identifier.epage301-
dc.publisher.placeItaly-

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