Date: 3 October (Thu)
Place: West Wing, 6th floor, Colloquium Room and on the Web (zoom)
Time: 16:30–18:00
Speaker: Taiho Wang (Baruch College)
Title: Relative entropy-regularized robust optimal order execution under transient impact
Abstract:
In this talk, we cast optimal liquidation under linear temporary and transient price impact as a relative entropy-regularized robust optimal control problem. The problem is formulated as to maximize a reward-risk functional associated with the order execution agent’s profit-and-loss of trading and the execution risk taking into account market’s liquidity and uncertainty over a class of absolutely continuous strategies. The problem is made into an entropy-regularized stochastic differential game and is solved by adopting the principle of dynamic programming, yielding that the value function of the differential game satisfies an entropy-regularized Hamilton-Jacobi-Isaacs (rHJI) equation. Under the assumption of aggregate exponential transient impact and Gaussian prior, the rHJI equation reduces to a matrix Riccati differential equation. Further imposing constancy of the corresponding coefficients, the matrix Riccati differential equation can be linearized, resulting in analytical expressions for optimal strategy and trajectory as well as the posterior distribution of market activity. The talk is based on a joint work with Xue Cheng and Meng Wang.