Optimal Trade Execution in Illiquid Markets

We study optimal trade execution strategies in financial markets with discrete order flow. The agent has a finite liquidation horizon and must minimize price impact given a random number of incoming trade counterparties. Assuming that the order flow N is given by a Poisson process, we give a full analysis of the properties and computation of the optimal dynamic execution strategy. Extensions, whereby (a) N is a fully-observed regime-switching Poisson process; and (b) N is a Markov-modulated compound Poisson process driven by a hidden Markov chain, are also considered. We derive and compare the properties of the three cases and illustrate our results with computational examples.