Optimal execution and speculation with trade signals

Understand

We propose a price impact model where changes in prices are purely driven by the order flow in the market.

• The stochastic price impact of market orders and the arrival rates of limit and market orders are functions of the market liquidity process which reflects the balance of the demand and supply of liquidity.
• Limit and market orders mutually excite each other so that liquidity is mean reverting.
• We use the theory of Meyer-$\sigma$-fields to introduce a short-term signal process from which a trader learns about imminent changes in order flow.