Optimal submission problem in a limit order book with var constraints

Na Song, Wai Ki Ching, Tak Kuen Siu, Ka Fai Cedric Yiu

Research output: Chapter in book / Conference proceedingConference article published in proceeding or bookAcademic researchpeer-review

2 Citations (Scopus)

Abstract

We consider an optimal selection problem for bid and ask quotes subject to a value-at-Risk (VaR) constraint when arrivals of the buy and sell orders are governed by a Poisson process. The problem is formulated as a constrained utility maximization problem over a finite time horizon. Using a diffusion approximation to Poisson arrivals of market orders, the dynamic programming principle can be applied here. We propose an efficient procedure to solve this constrained utility maximization problem based on a successive approximation algorithm. Numerical examples with and without the VaR constraint are used to illustrate the effect of the risk constraint on the dealer's choices. We also conduct numerical experiments to analyze the impacts of the risk constraint on dealer's terminal profit.
Original languageEnglish
Title of host publicationProceedings of the 2012 5th International Joint Conference on Computational Sciences and Optimization, CSO 2012
Pages266-270
Number of pages5
DOIs
Publication statusPublished - 31 Oct 2012
Event2012 5th International Joint Conference on Computational Sciences and Optimization, CSO 2012 - Harbin, Heilongjiang, China
Duration: 23 Jun 201226 Jun 2012

Conference

Conference2012 5th International Joint Conference on Computational Sciences and Optimization, CSO 2012
CountryChina
CityHarbin, Heilongjiang
Period23/06/1226/06/12

Keywords

  • Diffusion Approximation
  • High-frequency trading
  • HJB equations
  • Limit order book
  • VaR

ASJC Scopus subject areas

  • Computational Mathematics
  • Theoretical Computer Science

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