Reinforcement Learning for Optimal Execution When Liquidity Is Time-Varying

Optimal execution is an important problem faced by any trader. Most solutions are based on the assumption of constant market impact, while liquidity is known to be dynamic. Moreover, models with time-varying liquidity typically assume that it is observable, despite the fact that, in reality, it is latent and hard to measure in real time. In this paper we show that the use of Double Deep Q-learning, a form of Reinforcement Learning based on neural networks, is able to learn optimal trading policies when liquidity is time-varying. Specifically, we consider an Almgren-Chriss framework with temporary and permanent impact parameters following several deterministic and stochastic dynamics. Using extensive numerical experiments, we show that the trained algorithm learns the optimal policy when the analytical solution is available, and overcomes benchmarks and approximated solutions when the solution is not available.

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Publication Details

Journal
Applied Mathematical Finance
Published
2024-09-02
DOI
https://doi.org/10.1080/1350486x.2025.2490157
Citations
4
Primary Topic
Scheduling and Optimization Algorithms
Type
article
Field-Weighted Citation Impact
1.40
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article

Reinforcement Learning for Optimal Execution When Liquidity Is Time-Varying

Fabrizio Lillo, Andrea Macrì
4 citations
Applied Mathematical Finance
Scheduling and Optimization Algorithms
1.40
article

Reinforcement Learning for Optimal Execution When Liquidity Is Time-Varying

Fabrizio Lillo, Andrea Macrì
article en
4 citations

Abstract

Optimal execution is an important problem faced by any trader. Most solutions are based on the assumption of constant market impact, while liquidity is known to be dynamic. Moreover, models with time-varying liquidity typically assume that it is observable, despite the fact that, in reality, it is latent and hard to measure in real time. In this paper we show that the use of Double Deep Q-learning, a form of Reinforcement Learning based on neural networks, is able to learn optimal trading policies when liquidity is time-varying. Specifically, we consider an Almgren-Chriss framework with temporary and permanent impact parameters following several deterministic and stochastic dynamics. Using extensive numerical experiments, we show that the trained algorithm learns the optimal policy when the analytical solution is available, and overcomes benchmarks and approximated solutions when the solution is not available.

Applied Mathematical FinanceVol. 31(5)
Scuola Normale Superiore (IT), University of Bologna (IT)
Openalex Percentile: Top 15%
Scheduling and Optimization Algorithms
1.40
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Reinforcement Learning for Optimal Execution When Liquidity Is Time-Varying — Fabrizio Lillo, Andrea Macrì · Applied Mathematical Finance (2024) | TGRS Research Map | TGRS