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Optimal execution and block trade pricing: a general framework

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  • Olivier Gu'eant

Abstract

In this article, we develop a general framework to study optimal execution and to price block trades. We prove existence of optimal liquidation strategies and we provide regularity results for optimal strategies under very general hypotheses. We exhibit a Hamiltonian characterization for the optimal strategy that can be used for numerical approximation. We also 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.

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  • Olivier Gu'eant, 2012. "Optimal execution and block trade pricing: a general framework," Papers 1210.6372, arXiv.org, revised Dec 2014.
    • Handle: RePEc:arx:papers:1210.6372
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    References listed on IDEAS

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    1. Erhan Bayraktar & Michael Ludkovski, 2014. "Liquidation In Limit Order Books With Controlled Intensity," Mathematical Finance, Wiley Blackwell, vol. 24(4), pages 627-650, October.
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    5. 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.
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    7. Peter Kratz & Torsten Schoneborn, 2012. "Portfolio liquidation in dark pools in continuous time," Papers 1201.6130, arXiv.org, revised Aug 2012.
    8. Alexander Schied & Torsten Schoneborn & Michael Tehranchi, 2010. "Optimal Basket Liquidation for CARA Investors is Deterministic," Applied Mathematical Finance, Taylor & Francis Journals, vol. 17(6), pages 471-489.
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    10. 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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