A Closed-Form Execution Strategy to Target Volume Weighted Average Price
SIAM Journal on Financial Mathematics, Vol. 7, pp. 760–785, (2016)
32 Pages Posted: 24 Dec 2014 Last revised: 13 Nov 2016
Date Written: January 26, 2015
We provide two explicit closed-form optimal execution strategies to target VWAP. We do this under very general assumptions about the stochastic process followed by the volume traded in the market, and, unlike earlier studies, we account for permanent price impact stemming from order-flow of the agent and all other traders. One of the strategies consists of TWAP adjusted upward by a fraction of instantaneous order-flow and adjusted downward by the average order-flow that is expected over the remaining life of the strategy. The other strategy consists of the Almgren-Chriss execution strategy adjusted by the expected volume and net order-flow during the remaining life of the strategy. We calibrate model parameters to five stocks traded in Nasdaq (FARO, SMH, NTAP, ORCL, INTC) and use simulations to show that the strategies target VWAP very closely and on average outperform the target by between 0.10 and 8 basis points.
Keywords: VWAP, POV, TWAP, Algorithmic Trading, High Frequency Trading, Acquisition, Liquidation
JEL Classification: C6, C61, D81, G1, G13
Suggested Citation: Suggested Citation