Optimal Trade Execution with Coherent Dynamic Risk Measures
Carnegie Mellon University - David A. Tepper School of Business
Javier F. Peña
affiliation not provided to SSRN
August 10, 2012
We study the problem of optimal trade execution in an illiquid market by minimizing the coherent dynamic risk of the implementation shortfall. The prices of the assets are modeled as a discrete-time Markov process perturbed by both temporal and permanent impacts related to the trading volume. A closed-form optimal strategy is obtained for liquidating a single asset. In the case of multiple assets, we show that the optimal execution problem is equivalent to a saddle-point problem, for which efficient first-order methods are utilized to compute the optimal strategy numerically.
Number of Pages in PDF File: 35
Keywords: optimal trade execution, coherent dynamic risk measure, saddle-point problem
Date posted: September 23, 2012
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