Curve following in illiquid markets |
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Authors: | Felix Naujokat Nicholas Westray |
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Affiliation: | 1. Institut f??r Mathematik, Humboldt-Universit?t zu Berlin, Unter den Linden 6, 10099, Berlin, Germany 2. Quantitative Products Laboratory, Berlin, Germany
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Abstract: | In this article the problem of curve following in an illiquid market is addressed. The optimal control is characterised in terms of the solution to a coupled FBSDE involving jumps via the technique of the stochastic maximum principle. Analysing this FBSDE, we further show that there are buy and sell regions. In the case of quadratic penalty functions the FBSDE admits an explicit solution which is determined via the four step scheme. The dependence of the optimal control on the target curve is studied in detail. |
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