Optimal VWAP Execution Under Transient Price Impact

20 Pages Posted: 28 May 2019

See all articles by Alexander Barzykin

Alexander Barzykin

HSBC FX eRisk, Global Markets, HSBC Bank Plc., UK

Fabrizio Lillo

Università di Bologna

Date Written: February 8, 2019

Abstract

We solve the problem of optimal liquidation with Volume-Weighted Average Price (VWAP) benchmark when the market impact is linear and transient. Our setting is indeed more general as it considers the case when the trading interval is not necessarily coincident with the benchmark interval: Implementation Shortfall and Target Close execution are shown to be particular cases of our setting. We find explicit solutions in continuous and discrete time considering risk averse investors having a CARA utility function. Finally, we show that, contrary to what is observed for Implementation Shortfall, the optimal VWAP solution contains both buy and sell trades also when the decay kernel is convex.

Keywords: Optimal execution, Volume Weighted Average Price (VWAP), Transient price impact, Transaction costs, Market microstructure

Suggested Citation

Barzykin, Alexander and Lillo, Fabrizio, Optimal VWAP Execution Under Transient Price Impact (February 8, 2019). Available at SSRN: https://ssrn.com/abstract=3380177 or http://dx.doi.org/10.2139/ssrn.3380177

Alexander Barzykin

HSBC FX eRisk, Global Markets, HSBC Bank Plc., UK ( email )

Fabrizio Lillo (Contact Author)

Università di Bologna ( email )

Via Zamboni, 33
Bologna, 40126
Italy

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