Block Trade Contracting

Journal of Financial Economics, volume 160, 2024 [10.1016/j.jfineco.2024.103901]

90 Pages Posted: 18 Feb 2021 Last revised: 19 Jul 2024

See all articles by Markus Baldauf

Markus Baldauf

University of British Columbia (UBC) - Sauder School of Business

Christoph Frei

University of Alberta - Department of Mathematical and Statistical Sciences

Joshua Mollner

Northwestern University - Kellogg School of Management

Date Written: June 21, 2024

Abstract

We study the optimal execution problem in a principal-agent setting. A client contracts to purchase from a dealer. The dealer hedges, buying from the market, creating temporary and permanent price impact. The client chooses a contract, which specifies payment as a function of market prices; hidden action precludes conditioning on the dealer's hedging trades. We show the first-best benchmark is theoretically achievable with an unrestricted contract set. We then consider weighted-average-price contracts, which are commonly used. In the continuous-time limit, the optimal weighting entails a constant density at interior times and discrete masses at the extremes.

Keywords: agency conflict, block trading, contracting, dealer-client relationship, price impact

JEL Classification: G11, G14, G23, D82, D86

Suggested Citation

Baldauf, Markus and Frei, Christoph and Mollner, Joshua, Block Trade Contracting (June 21, 2024). Journal of Financial Economics, volume 160, 2024 [10.1016/j.jfineco.2024.103901], Available at SSRN: https://ssrn.com/abstract=3778956 or http://dx.doi.org/10.1016/j.jfineco.2024.103901

Markus Baldauf

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada

HOME PAGE: http://https://www.sauder.ubc.ca/people/markus-baldauf

Christoph Frei

University of Alberta - Department of Mathematical and Statistical Sciences ( email )

Edmonton, Alberta T6G 2G1
Canada

HOME PAGE: http://www.math.ualberta.ca/~cfrei/

Joshua Mollner (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2211 Campus Drive
Evanston, IL 60208
United States

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