Optimal execution and block trade pricing: a general framework
AbstractIn this article, we develop a general CARA framework to study optimal execution and to price block trades. We prove existence and regularity results for optimal liquidation strategies under very general hypotheses, and we provide a hamiltonian characterization for the optimal strategy. We then focus on the important topic of block trade pricing and we propose a methodology to give a price to financial (il)liquidity. In particular, we provide a closed-form formula for the price of a block trade when there is no time constraint to liquidate. Numerical methods are eventually discussed.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1210.6372.
Date of creation: Oct 2012
Date of revision: Jul 2013
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Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-11-03 (All new papers)
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- Olivier Gu\'eant & Charles-Albert Lehalle & Joaquin Fernandez Tapia, 2011. "Optimal Portfolio Liquidation with Limit Orders," Papers 1106.3279, arXiv.org, revised Jul 2012.
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