Optimal execution with weighted impact functions: a quadratic programming approach

Optimal execution with weighted impact functions: a quadratic programming approach

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Article ID: iaor20132060
Volume: 7
Issue: 3
Start Page Number: 575
End Page Number: 592
Publication Date: Mar 2013
Journal: Optimization Letters
Authors: , , ,
Keywords: investment, programming: quadratic, programming: dynamic
Abstract:

In this paper, we develop optimal trading strategies for a risk averse investor by minimizing the expected cost and the risk of execution. Here we consider a law of motion for price which uses a convex combination of temporary and permanent market impact. In the special case of unconstrained problem for a risk neutral investor, we obtain a closed form solution for optimal trading strategies by using dynamic programming. For a general problem, we use a quadratic programming approach to get approximate dynamic optimal trading strategies. Further, numerical examples of optimal execution strategies are provided for illustration purposes.

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