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138
The Illiquidity of Corporate Bonds
, 2010
"... This paper examines the illiquidity of corporate bonds and its assetpricing implications. Using transactionlevel data from 2003 through 2009, we show that the illiquidity in corporate bonds is substantial, significantly greater than what can be explained by bidask spreads. We establish a strong li ..."
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Cited by 77 (14 self)
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This paper examines the illiquidity of corporate bonds and its assetpricing implications. Using transactionlevel data from 2003 through 2009, we show that the illiquidity in corporate bonds is substantial, significantly greater than what can be explained by bidask spreads. We establish a strong link between bond illiquidity and bond prices, both in aggregate and in the crosssection. In aggregate, changes in the market level illiquidity explain a substantial part of the time variation in yield spreads of highrated (AAA through A) bonds, overshadowing the credit risk component. In the crosssection, the bondlevel illiquidity measure explains individual bond yield spreads with large economic significance.
Talreja: A stochastic model for order book dynamics
, 2003
"... We propose a stochastic model for the continuoustime dynamics of a limit order book. The model strikes a balance between two desirable features: it captures key empirical properties of order book dynamics and its analytical tractability allows for fast computation of various quantities of interest ..."
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Cited by 67 (2 self)
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We propose a stochastic model for the continuoustime dynamics of a limit order book. The model strikes a balance between two desirable features: it captures key empirical properties of order book dynamics and its analytical tractability allows for fast computation of various quantities of interest without resorting to simulation. We describe a simple parameter estimation procedure based on highfrequency observations of the order book and illustrate the results on data from the Tokyo stock exchange. Using Laplace transform methods, we are able to efficiently compute probabilities of various events, conditional on the state of the order book: an increase in the midprice, execution of an order at the bid before the ask quote moves, and execution of both a buy and a sell order at the best quotes before the price moves. Comparison with highfrequency data shows that our model can capture accurately the short term dynamics of the limit order book.
Risk aversion and the dynamics of optimal liquidation strategies in illiquid markets
 Finance and Stochastics
"... in illiquid markets ..."
Optimal Execution in a General OneSided LimitOrder Book and Endogenous . . .
 SIAM JOURNAL ON FINANCIAL MATHEMATICS
, 2011
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Measuring the Resiliency of an Electronic Limit Order Book
 Journal of Financial Markets
, 2007
"... An electronic limit order book is resilient when it reverts to its normal shape promptly after large trades. This paper suggests a continuoustime impulse response function based on intensities, which formalizes resiliency in terms of a timeframe and probability of order book replenishment. This i ..."
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Cited by 35 (1 self)
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An electronic limit order book is resilient when it reverts to its normal shape promptly after large trades. This paper suggests a continuoustime impulse response function based on intensities, which formalizes resiliency in terms of a timeframe and probability of order book replenishment. This is then estimated for trading on an LSE order book, using an appropriate parametric model which views orders and cancellations as a mutuallyexciting tenvariate Hawkes point process. Consistent with findings in the related literature, in over 60 per cent of cases, the order book does not replenish reliably after a large trade. However, if it does replenish, it does so with a fairly fast half life of around 20 seconds. Various other dynamics are quantified.
Dynamic Trading with Predictable Returns and Transaction Costs
, 2009
"... This paper derives in closed form the optimal dynamic portfolio policy when trading is costly and security returns are predictable by signals with different mean reversion speeds. The optimal updated portfolio is a linear combination of the existing portfolio, the optimal current portfolio absent tr ..."
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Cited by 32 (4 self)
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This paper derives in closed form the optimal dynamic portfolio policy when trading is costly and security returns are predictable by signals with different mean reversion speeds. The optimal updated portfolio is a linear combination of the existing portfolio, the optimal current portfolio absent trading costs, and the optimal portfolio based on future expected returns. Predictors with slower mean reversion (alpha decay) get more weight since they lead to a favorable positioning both now and in the future. We implement the optimal policy for commodity futures and show that the resulting portfolio has superior returns net of trading costs relative to more naive benchmarks. Finally, we derive natural equilibrium implications, including that demand shocks with faster mean reversion command a higher return premium.
Nodynamicarbitrage and market impact
 Social Science Research Network Working Paper Series
, 2008
"... Starting from a nodynamicarbitrage principle that imposes that trading costs should be nonnegative on average and a simple model for the evolution of market prices, we demonstrate a relationship between the shape of the market impact function describing the average response of the market price to ..."
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Cited by 32 (0 self)
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Starting from a nodynamicarbitrage principle that imposes that trading costs should be nonnegative on average and a simple model for the evolution of market prices, we demonstrate a relationship between the shape of the market impact function describing the average response of the market price to traded quantity and the function that describes the decay of market impact. In particular, we show that the widelyassumed exponential decay of market impact is compatible only with linear market impact. We derive various inequalities relating the typical shape of the observed market impact function to the decay of market impact, noting that empirically, these inequalities are typically close to being equalities. 1
Clustering of order arrivals, price impact and trade path optimisation
 In Workshop on Financial Modeling with Jump processes, Ecole Polytechnique
, 2006
"... We fit a bivariate Hawkes process to arrival data for buy and sell trades in FX markets. The model can be used to predict future imbalance of buy and sell trades conditional on history of recent trade arrivals. We derive formulae for the raw price impact of a trade as a function of time assuming tha ..."
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Cited by 29 (0 self)
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We fit a bivariate Hawkes process to arrival data for buy and sell trades in FX markets. The model can be used to predict future imbalance of buy and sell trades conditional on history of recent trade arrivals. We derive formulae for the raw price impact of a trade as a function of time assuming that trade arrivals are governed by a Hawkes process and that the price is a martingale, and show that the price impact of a series of trades is given by superposition of their individual price impacts. We use these formulae to parameterise a model for optimal liquidation strategies. 1
Constrained portfolio liquidation in a limit order book model
 Banach Center Publ
, 2008
"... Abstract. We consider the problem of optimally placing market orders so as to minimize the expected liquidity costs from buying a given amount of shares. The liquidity price impact of market orders is described by an extension of a model for a limit order book with resilience that was proposed by Ob ..."
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Cited by 25 (10 self)
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Abstract. We consider the problem of optimally placing market orders so as to minimize the expected liquidity costs from buying a given amount of shares. The liquidity price impact of market orders is described by an extension of a model for a limit order book with resilience that was proposed by Obizhaeva and Wang (2006). We extend their model by allowing for a timedependent resilience rate, arbitrary trading times, and general equilibrium dynamics for the unaffected bid and ask prices. Our main results solve the problem of minimizing the expected liquidity costs within a given convex set of predictable trading strategies by reducing it to a deterministic optimization problem. This deterministic problem is explicitly solved for the case in which the convex set of strategies is defined via finitely many linear constraints. A detailed study of optimal portfolio liquidation in markets with opening and closing call auctions is provided as 2000 Mathematics Subject Classification: 91B26, 91B28, 91B70, 93E20, 60G35. Key words and phrases: liquidity risk, optimal portfolio liquidation, limit order book with resilience, call auction, market impact model, constrained trading strategies, market order. Research of the first two authors was supported by Deutsche Forschungsgemeinschaft through the Research Center Matheon “Mathematics for key technologies ” (FZT 86). The paper is in final form and no version of it will be published elsewhere. [9] c ○ Instytut Matematyczny PAN, 200810 A. ALFONSI ET AL. an illustration. We also obtain closedform solutions for the unconstrained portfolio liquidation problem in our timeinhomogeneous setting and thus extend a result from our earlier paper [1]. 1. Introduction. A