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Optimal VWAP execution under transient price impact

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  • Alexander Barzykin
  • Fabrizio Lillo

Abstract

We solve the problem of optimal liquidation with volume weighted average price (VWAP) benchmark when the market impact is linear and transient. Our setting is indeed more general as it considers the case when the trading interval is not necessarily coincident with the benchmark interval: Implementation Shortfall and Target Close execution are shown to be particular cases of our setting. We find explicit solutions in continuous and discrete time considering risk averse investors having a CARA utility function. Finally, we show that, contrary to what is observed for Implementation Shortfall, the optimal VWAP solution contains both buy and sell trades also when the decay kernel is convex.

Suggested Citation

  • Alexander Barzykin & Fabrizio Lillo, 2019. "Optimal VWAP execution under transient price impact," Papers 1901.02327, arXiv.org, revised Jan 2019.
    • Handle: RePEc:arx:papers:1901.02327
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    References listed on IDEAS

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    1. Aur'elien Alfonsi & Antje Fruth & Alexander Schied, 2007. "Optimal execution strategies in limit order books with general shape functions," Papers 0708.1756, arXiv.org, revised Feb 2010.
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    6. Olivier Gu'eant & Guillaume Royer, 2013. "VWAP execution and guaranteed VWAP," Papers 1306.2832, arXiv.org, revised May 2014.
    7. Enzo Busseti & Fabrizio Lillo, 2012. "Calibration of optimal execution of financial transactions in the presence of transient market impact," Papers 1206.0682, arXiv.org.
    8. Alfonsi Aurélien & Alexander Schied & Alla Slynko, 2012. "Order Book Resilience, Price Manipulation, and the Positive Portfolio Problem," Post-Print hal-00941333, HAL.
    9. Gianbiagio Curato & Jim Gatheral & Fabrizio Lillo, 2017. "Optimal execution with non-linear transient market impact," Quantitative Finance, Taylor & Francis Journals, vol. 17(1), pages 41-54, January.
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    Cited by:

    1. Nino Antulov-Fantulin & Tian Guo & Fabrizio Lillo, 2021. "Temporal mixture ensemble models for probabilistic forecasting of intraday cryptocurrency volume," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 44(2), pages 905-940, December.

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