Optimal Execution with Quadratic Variation Inventories

Abstract

SIAM Journal on Financial Mathematics, Volume 14, Issue 3, Page 751-776, September 2023.
Abstract. The first half of the paper is devoted to description and implementation of statistical tests arguing for the presence of a Brownian component in the inventories and wealth processes of individual traders. We use intraday data from the Toronto Stock Exchange to provide empirical evidence of this claim. We work with regularly spaced time intervals, as well as with asynchronously observed data. The tests reveal with high significance the presence of a nonzero Brownian motion component. The second half of the paper is concerned with the analysis of trader behaviors throughout the day. We extend the theoretical analysis of an existing optimal execution model to accommodate the presence of Itô inventory processes, and we compare empirically the optimal behavior of traders in such fitted models to the actual behavior we read off the data.