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