Price impact of large orders using Hawkes processes

Lucas Amaral, Andrew Papanicolaou

Abstract


We introduce a model for the execution of large market orders in limit order books, and use a linear combination of self-exciting Hawkes processes to model asset-price dynamics, with the addition of a price-impact function that is concave in the order size. A criterion for a general price-impact function is introduced, which is used to show how specification of a concave impact function affects order execution. Using our model, we examine the immediate and permanent impacts of large orders, analyse the potential for price manipulation, and show the effectiveness of the time-weighted average price strategy. Our model shows that price depends on the balance between the intensities of the Hawkes process, which can be interpreted as a dependence on order-flow imbalance.



doi:10.1017/S1446181119000038

Keywords


price-impact function, limit order books, execution of large orders, Hawkes processes.



DOI: https://doi.org/10.21914/anziamj.v61i0.12912



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ANZIAM Journal, ISSN 1446-8735, copyright Australian Mathematical Society.