Li, Bingbing (2013) Optimal execution with Hawkes market impact functions. PhD thesis, University of Warwick.

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Abstract

This thesis studies the modeling of irregularly spaced tick data using intensity mod-
els, and the optimal trading strategy for executing orders based on these models. It is
divided into five chapters: Time-deformation modeling of FX returns, Modeling the inten-
sity of trades using order book information, Optimal execution with Hawkes market impact
functions, A dynamic adaptive strategy, and Applications of dynamic adaptive strategy.
Time-deformation modeling of FX returns. We model trade arrival rates using a Hawkes
process in an FX market. We show that the Hawkes process produces a good fit and is
able to capture the empirical characteristics of the trade arrival data. Using a wavelet jump
detection method we separate the data into two components and employ Hawkes processes
to model each individually. An intensity-based volatility estimator is proposed and tested
with market data, and compared with realized volatility measures in a forecasting exercise.
The intensity-based volatility is derived from a structural volatility model and we show that
it is able to forecast volatility with great precision.
Modeling the intensity of trades using order book information. Using information from
the limit order book, the proposed framework takes into account measures of aggregated
market activity and order imbalance in the bid and ask queue to model intensity. Empirical
analysis shows that the inclusion of covariates in the Hawkes model improves the fit of the
intensity model and provides a better volatility forecast. In addition we show how order
book resiliency can be measured using estimates of the Hawkes process.
Optimal execution with Hawkes market impact functions. We derive the optimal execu-
tion strategy without imposing the assumption of a pure buy strategy. The optimal solution
is obtained by finding a trade-o¤ between the market impact costs of trading and the price
risk of slow execution. We derive the optimal solution in closed form in a variety of settings
and study their properties. A dynamic adaptive strategy. We modify the strategy derived in chapter 4 to a dynamic
adaptive strategy by admitting only a pure buy strategy. We study the dynamic adaptive
strategy in various situations such as including a positive or negative drift in the price
process and a risk aversion coefficient. The strategy allows for adaption to changes of
market conditions. We test it using simulated data and compare it with commonly use
practical execution strategies such as VWAP and POV.
Applications of the dynamic adaptive strategy. We examine the optimal execution strat-
egy where the market resiliency function is specified by a Hawkes process with a power law
decay function and then implement the optimal trading strategy using real market data.

Item Type:	Thesis (PhD)
Subjects:	H Social Sciences > HG Finance
Library of Congress Subject Headings (LCSH):	Foreign exchange market -- Econometric models, Optimal stopping (Mathematical statistics)
Official Date:	April 2013
Dates:	Date Event April 2013 Submitted
Institution:	University of Warwick
Theses Department:	Warwick Business School
Thesis Type:	PhD
Publication Status:	Unpublished
Supervisor(s)/Advisor:	Salmon, Mark
Extent:	viii, 203 leaves : charts.
Language:	eng

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