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- Publisher Website: 10.1007/s10203-020-00278-8
- Scopus: eid_2-s2.0-85081903020
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Article: Trading Strategy with stochastic volatility in a limit order book market
Title | Trading Strategy with stochastic volatility in a limit order book market |
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Authors | |
Keywords | Limit order book (LOB) Dynamic programming (DP) Hamilton–Jacobi–Bellman (HJB) equation Market impact Stochastic volatility (SV) model |
Issue Date | 2020 |
Publisher | Springer-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? |
Abstract | In 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 Identifier | http://hdl.handle.net/10722/300668 |
ISSN | 2023 Impact Factor: 1.4 2023 SCImago Journal Rankings: 0.458 |
ISI Accession Number ID |
DC Field | Value | Language |
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dc.contributor.author | YANG, Q | - |
dc.contributor.author | Ching, WK | - |
dc.contributor.author | Gu, J | - |
dc.contributor.author | Siu, TK | - |
dc.date.accessioned | 2021-06-18T14:55:17Z | - |
dc.date.available | 2021-06-18T14:55:17Z | - |
dc.date.issued | 2020 | - |
dc.identifier.citation | Decisions in Economics and Finance, 2020, v. 43 n. 1, p. 277-301 | - |
dc.identifier.issn | 1593-8883 | - |
dc.identifier.uri | http://hdl.handle.net/10722/300668 | - |
dc.description.abstract | In 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.language | eng | - |
dc.publisher | Springer-Verlag Italia Srl. The Journal's web site is located at https://www.springer.com/journal/10203 | - |
dc.relation.ispartof | Decisions in Economics and Finance | - |
dc.rights | Accepted 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.subject | Limit order book (LOB) | - |
dc.subject | Dynamic programming (DP) | - |
dc.subject | Hamilton–Jacobi–Bellman (HJB) equation | - |
dc.subject | Market impact | - |
dc.subject | Stochastic volatility (SV) model | - |
dc.title | Trading Strategy with stochastic volatility in a limit order book market | - |
dc.type | Article | - |
dc.identifier.email | Ching, WK: wching@hku.hk | - |
dc.identifier.authority | Ching, WK=rp00679 | - |
dc.description.nature | link_to_subscribed_fulltext | - |
dc.identifier.doi | 10.1007/s10203-020-00278-8 | - |
dc.identifier.scopus | eid_2-s2.0-85081903020 | - |
dc.identifier.hkuros | 323021 | - |
dc.identifier.volume | 43 | - |
dc.identifier.issue | 1 | - |
dc.identifier.spage | 277 | - |
dc.identifier.epage | 301 | - |
dc.identifier.isi | WOS:000543993200015 | - |
dc.publisher.place | Italy | - |