Dynamic Portfolio Execution

Management Science, Forthcoming

44 Pages Posted: 24 Jun 2012 Last revised: 1 Jul 2017

See all articles by Gerry Tsoukalas

Gerry Tsoukalas

University of Pennsylvania - The Wharton School

Jiang Wang

Massachusetts Institute of Technology (MIT) - Sloan School of Management; China Academy of Financial Research (CAFR); National Bureau of Economic Research (NBER)

Kay Giesecke

Stanford University - Management Science & Engineering

Date Written: May 22, 2017

Abstract

We analyze the optimal execution problem of a portfolio manager trading multiple assets. In addition to the liquidity and risk of each individual asset, we consider cross-asset interactions in these two dimensions, which substantially enriches the nature of the problem. Focusing on the market microstructure, we develop a tractable order book model to capture liquidity supply/demand dynamics in a multi-asset setting, which allows us to formulate and solve the optimal portfolio execution problem. We find that cross-asset risk and liquidity considerations are of critical importance in constructing the optimal execution policy. We show that even when the goal is to trade a single asset, its optimal execution may involve transitory trades in other assets. In general, optimally managing the risk of the portfolio during the execution process affects the time synchronization of trading in different assets. Moreover, links in the liquidity across assets lead to complex patterns in the optimal execution policy. In particular, we highlight cases where aggregate costs can be reduced by temporarily overshooting one's target portfolio.

Suggested Citation

Tsoukalas, Gerry and Wang, Jiang and Giesecke, Kay, Dynamic Portfolio Execution (May 22, 2017). Management Science, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2089837 or http://dx.doi.org/10.2139/ssrn.2089837

Gerry Tsoukalas (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Jiang Wang

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

E62-614
100 Main Street
Cambridge, MA 02142
United States
617-253-2632 (Phone)
617-258-6855 (Fax)

China Academy of Financial Research (CAFR)

1954 Huashan Road
Shanghai P.R.China, 200030
China

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Kay Giesecke

Stanford University - Management Science & Engineering ( email )

475 Via Ortega
Stanford, CA 94305
United States
(650) 723 9265 (Phone)
(650) 723 1614 (Fax)

HOME PAGE: http://https://giesecke.people.stanford.edu

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