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Dynamic Trading Policies With Price Impact

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  • Hua He
  • Harry Mamaysky
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Abstract

In this paper we analyze the optimal policy for a risk averse agent who wants to sell a large block of shares of a risky security in the presence of price impact and transactions costs. Our framework reduces to the standard Merton portfolio problem in the absence of any market frictions. Optimal liquidation results in revenue distributions which are substantially different from those generated by a naive strategy. The main tradeoff involves choosing between revenue distri

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File URL: http://icfpub.som.yale.edu/publications/2420
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Bibliographic Info

Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm244.

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Date of creation: 01 Nov 2001
Date of revision: 01 Jan 2002
Handle: RePEc:ysm:somwrk:ysm244

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Web page: http://icf.som.yale.edu/
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  1. R. C. Merton, 1970. "Optimum Consumption and Portfolio Rules in a Continuous-time Model," Working papers 58, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Andrew J. Morton & Stanley R. Pliska, 1995. "Optimal Portfolio Management With Fixed Transaction Costs," Mathematical Finance, Wiley Blackwell, vol. 5(4), pages 337-356.
  3. Holthausen, Robert W. & Leftwich, Richard W. & Mayers, David, 1990. "Large-block transactions, the speed of response, and temporary and permanent stock-price effects," Journal of Financial Economics, Elsevier, vol. 26(1), pages 71-95, July.
  4. Longstaff, Francis A, 2001. "Optimal Portfolio Choice and the Valuation of Illiquid Securities," Review of Financial Studies, Society for Financial Studies, vol. 14(2), pages 407-31.
  5. Chan, Louis K C & Lakonishok, Josef, 1995. " The Behavior of Stock Prices around Institutional Trades," Journal of Finance, American Finance Association, vol. 50(4), pages 1147-74, September.
  6. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
  7. Dimitri Vayanos, 2001. "Strategic trading in a dynamic noisy market," LSE Research Online Documents on Economics 447, London School of Economics and Political Science, LSE Library.
  8. Bertsimas, Dimitris & Lo, Andrew W., 1998. "Optimal control of execution costs," Journal of Financial Markets, Elsevier, vol. 1(1), pages 1-50, April.
  9. Hindy, Ayman & Huang, Chi-fu & Zhu, Steven H., 1997. "Numerical analysis of a free-boundary singular control problem in financial economics," Journal of Economic Dynamics and Control, Elsevier, vol. 21(2-3), pages 297-327.
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Cited by:
  1. Forsyth, P.A. & Kennedy, J.S. & Tse, S.T. & Windcliff, H., 2012. "Optimal trade execution: A mean quadratic variation approach," Journal of Economic Dynamics and Control, Elsevier, vol. 36(12), pages 1971-1991.
  2. Guéant, Olivier & Lehalle, Charles-Albert & Tapia, Joaquin Fernandez, 2011. "Optimal Portfolio Liquidation with Limit Orders," Economics Papers from University Paris Dauphine 123456789/7391, Paris Dauphine University.
  3. Takashi Kato, 2011. "An Optimal Execution Problem with a Geometric Ornstein-Uhlenbeck Price Process," Papers 1107.1787, arXiv.org, revised Jul 2014.
  4. Vathana Ly Vath & Mohamed Mnif & Huyên Pham, 2007. "A model of optimal portfolio selection under liquidity risk and price impact," Finance and Stochastics, Springer, vol. 11(1), pages 51-90, January.
  5. 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.
  6. Olivier Gu\'eant & Charles-Albert Lehalle, 2012. "General Intensity Shapes in Optimal Liquidation," Papers 1204.0148, arXiv.org, revised Jun 2013.
  7. Fabien Guilbaud & Mohamed Mnif & Huy\^en Pham, 2010. "Numerical methods for an optimal order execution problem," Papers 1006.0768, arXiv.org.
  8. Obizhaeva, Anna A. & Wang, Jiang, 2013. "Optimal trading strategy and supply/demand dynamics," Journal of Financial Markets, Elsevier, vol. 16(1), pages 1-32.
  9. Anna Obizhaeva & Jiang Wang, 2005. "Optimal Trading Strategy and Supply/Demand Dynamics," NBER Working Papers 11444, National Bureau of Economic Research, Inc.
  10. Pereira, João Pedro & Zhang, Harold H., 2010. "Stock Returns and the Volatility of Liquidity," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 45(04), pages 1077-1110, August.

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