Execution Costs and Efficient Execution Frontiers

Madan, Dilip

doi:10.2139/ssrn.1679523

Abstract

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Execution Costs and Efficient Execution Frontiers

Dilip B. Madan

University of Maryland - Robert H. Smith School of Business

August 18, 2010

Robert H. Smith School Research Paper No. RHS 06-131

Abstract:
Single period risks acceptable to the market at zero cost are modeled by a convex set of random variables leading to bid and ask prices that are trade size dependent. The theory of nonlinear expectations is employed to construct dynamically consistent sequences of bid and ask unit size prices that are size and trade date contingent. We then study the optimal design of spot and forward trading to minimize execution costs. Finally we illustrate the construction of a two period execution cost frontier trading a decrease in execution costs for additional exposure to price risk.

Number of Pages in PDF File: 23

Keywords: Convex sets of acceptable risks, Nonlinear Expectations, Scale and Direction Dependent Pricing

JEL Classification: G10, G12, G13

working papers series

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Date posted: September 20, 2010 ; Last revised: November 23, 2010

Suggested Citation

Madan, Dilip B., Execution Costs and Efficient Execution Frontiers (August 18, 2010). Robert H. Smith School Research Paper No. RHS 06-131. Available at SSRN: http://ssrn.com/abstract=1679523 or http://dx.doi.org/10.2139/ssrn.1679523

Contact Information

Dilip B. Madan (Contact Author)

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States
301-405-2127 (Phone)
301-314-9157 (Fax)