Optimal Portfolio Trading: Adaptive Multi-period Trade Execution
20 Pages Posted: 9 Apr 2020 Last revised: 20 Apr 2020
Date Written: March 26, 2020
We propose a new approach to adaptive multi-period trade execution which can be viewed as an extension of Grinold and Kahn (1995) and Almgren and Chriss (1999). Our methodology does not rely on any exogenous switching criteria but instead explicitly includes trading acceleration and deceleration depending on market conditions into equations describing the trading strategy. In other words, we consider adaptive trading strategies that (among other factors) condition on a current price and therefore are stochastic before the price is revealed. The new approach enables us to specify multi-period mean variance style utility function where expectations are taken over all possible realizations of the price process. Consequently while actual trading will still have stochastic nature, we can compute expected portfolio trading costs as well as optimal response to all market conditions on a pre-trade basis.
Keywords: optimal trade execution, adaptive trading
JEL Classification: G1, C6
Suggested Citation: Suggested Citation