Article ID: | iaor20132060 |
Volume: | 7 |
Issue: | 3 |
Start Page Number: | 575 |
End Page Number: | 592 |
Publication Date: | Mar 2013 |
Journal: | Optimization Letters |
Authors: | Chandra Suresh, Khemchandani Reshma, Gupta Nishil, Chaudhary Arpit |
Keywords: | investment, programming: quadratic, programming: dynamic |
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.