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)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Alexander Schied & Torsten Schöneborn, 2009.
"Risk aversion and the dynamics of optimal liquidation strategies in illiquid markets,"
Finance and Stochastics,
Springer, vol. 13(2), pages 181-204, April.
- Schied, Alexander & Schoeneborn, Torsten, 2008. "Risk aversion and the dynamics of optimal liquidation strategies in illiquid markets," MPRA Paper 7105, University Library of Munich, Germany.
- Alexander Schied & Torsten Schoneborn & Michael Tehranchi, 2010. "Optimal Basket Liquidation for CARA Investors is Deterministic," Applied Mathematical Finance, Taylor and Francis Journals, vol. 17(6), pages 471-489.
- Jim Gatheral, 2010. "No-dynamic-arbitrage and market impact," Quantitative Finance, Taylor and Francis Journals, vol. 10(7), pages 749-759.
- Olivier Gu\'eant & Charles-Albert Lehalle & Joaquin Fernandez Tapia, 2011. "Optimal Portfolio Liquidation with Limit Orders," Papers 1106.3279, arXiv.org, revised Jul 2012.
- Anna Obizhaeva & Jiang Wang, 2005. "Optimal Trading Strategy and Supply/Demand Dynamics," NBER Working Papers 11444, National Bureau of Economic Research, Inc.
- Peter Kratz & Torsten Sch\"oneborn, 2012. "Portfolio liquidation in dark pools in continuous time," Papers 1201.6130, arXiv.org, revised Aug 2012.
- Jim Gatheral & Alexander Schied, 2011. "Optimal Trade Execution Under Geometric Brownian Motion In The Almgren And Chriss Framework," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 14(03), pages 353-368.
- Bertsimas, Dimitris & Lo, Andrew W., 1998. "Optimal control of execution costs," Journal of Financial Markets, Elsevier, vol. 1(1), pages 1-50, April.
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