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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

Álvaro Cartea

University of Oxford; University of Oxford - Oxford-Man Institute of Quantitative Finance

Sebastian Jaimungal

University of Toronto - Department of Statistics

Date Written: January 26, 2015

Abstract

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

Cartea, Álvaro and Jaimungal, Sebastian, A Closed-Form Execution Strategy to Target Volume Weighted Average Price (January 26, 2015). SIAM Journal on Financial Mathematics, Vol. 7, pp. 760–785, (2016). Available at SSRN: https://ssrn.com/abstract=2542314 or http://dx.doi.org/10.2139/ssrn.2542314

Álvaro Cartea

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

University of Oxford - Oxford-Man Institute of Quantitative Finance ( email )

Eagle House
Walton Well Road
Oxford, Oxfordshire OX2 6ED
United Kingdom

Sebastian Jaimungal (Contact Author)

University of Toronto - Department of Statistics ( email )

100 St. George St.
Toronto, Ontario M5S 3G3
Canada

HOME PAGE: http://www.utstat.utoronto.ca/sjaimung

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