Order Book Resilience, Price Manipulation, and the Positive Portfolio Problem
Aurélien Alfonsi, Alexander Schied, Alla Slynko
Source abstract
The viability of a market impact model is usually considered to be equivalent to the absence of price manipulation strategies. By analyzing a model with linear instantaneous, transient, and permanent impact components, we discover a new class of irregularities, which we call transaction-triggered price manipulation strategies. We prove that price impact must decay as a convex nonincreasing function of time to exclude these market irregularities along with standard price manipulation. This result is based on a mathematical theorem on the positivity of minimizers of a quadratic form under a linear constraint, which is in turn related to the problem of excluding the existence of short sales in an optimal Markowitz portfolio.
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