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Shortermism and excessive risk taking in optimal execution with a target performance

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  • Emilio Barucci
  • Yuheng Lan

Abstract

We deal with the optimal execution problem when the broker's goal is to reach a performance barrier avoiding a downside barrier. The performance is provided by the wealth accumulated by trading in the market, the shares detained by the broker evaluated at the market price plus a slippage cost yielding a quadratic inventory cost. Over a short horizon, this type of remuneration leads, at the same time, to a more aggressive and less risky strategy compared to the classical one, and over a long horizon the performance turns to be poorer and more dispersed.

Suggested Citation

  • Emilio Barucci & Yuheng Lan, 2025. "Shortermism and excessive risk taking in optimal execution with a target performance," Papers 2505.15611, arXiv.org.
    • Handle: RePEc:arx:papers:2505.15611
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    File URL: http://arxiv.org/pdf/2505.15611
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    References listed on IDEAS

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    1. Browne, S., 1995. "Optimal Investment Policies for a Firm with a Random Risk Process: Exponential Utility and Minimizing the Probability of Ruin," Papers 95-08, Columbia - Graduate School of Business.
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    5. Emilio Barucci & Gaetano Bua & Daniele Marazzina, 2018. "On relative performance, remuneration and risk taking of asset managers," Annals of Finance, Springer, vol. 14(4), pages 517-545, November.
    6. Suleyman Basak & Anna Pavlova & Alexander Shapiro, 2007. "Optimal Asset Allocation and Risk Shifting in Money Management," The Review of Financial Studies, Society for Financial Studies, vol. 20(5), pages 1583-1621, 2007 21.
    7. Markus Baldauf & Christoph Frei & Joshua Mollner, 2022. "Principal Trading Arrangements: When Are Common Contracts Optimal?," Management Science, INFORMS, vol. 68(4), pages 3112-3128, April.
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    11. Emilio Barucci & Daniele Marazzina, 2015. "Risk Seeking, Nonconvex Remuneration And Regime Switching," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 18(02), pages 1-25.
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