Journal article
Optimal execution and speculation with trade signals
- 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 liquidity is mean reverting. We use the theory of Meyer-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 concur with that of 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.
- Publication status:
- Published
- Peer review status:
- Peer reviewed
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(Preview, Version of record, pdf, 1.8MB, Terms of use)
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- Publisher copy:
- 10.1007/s00780-026-00602-x
Authors
- Publisher:
- Springer
- Journal:
- Finance and Stochastics More from this journal
- Publication date:
- 2026-09-10
- Acceptance date:
- 2025-06-02
- DOI:
- EISSN:
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1432-1122
- ISSN:
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0949-2984
- Language:
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English
- Keywords:
- Pubs id:
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2132437
- Local pid:
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pubs:2132437
- Deposit date:
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2025-06-26
- ARK identifier:
Terms of use
- Copyright holder:
- Bank et al
- Copyright date:
- 2026
- Rights statement:
- © The Author(s) 2026. This article is licensed under a Creative Commons Attribution 4.0 International License, which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons licence, and indicate if changes were made. The images or other third party material in this article are included in the article’s Creative Commons licence, unless indicated otherwise in a credit line to the material. If material is not included in the article’s Creative Commons licence and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder. To view a copy of this licence, visit http://creativecommons.org/licenses/by/4.0/.
- Licence:
- CC Attribution (CC BY)
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