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Optimal Execution of Multiasset Block Orders under Stochastic Liquidity

  • Naoki Makimoto

    (Professor, Graduate School of Business Sciences, University of Tsukuba (E-mail:

  • Yoshihiko Sugihara

    (Deputy Director and Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:

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    In this paper, we develop a multiasset model of market liquidity and derive the optimal strategy for block order execution under both liquidity and volatility risk. The market liquidity flowing into and out of an order book is modeled as a mean-reverting stochastic process. Given the shape of the order book for each asset, we express the market impact of an execution as a recursive impact that recovers gradually with associated uncertainty. We then derive the optimal execution strategy as a closed-form solution to the mean-variance problem that optimizes the trade-off between the market impact and the volatility/liquidity risk given investor risk aversion. Using our model, we analyze some implications of the optimal execution strategy with comparative statics and simulations. We also discuss whether we avoid price manipulation with our optimal execution strategy.

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    Paper provided by Institute for Monetary and Economic Studies, Bank of Japan in its series IMES Discussion Paper Series with number 10-E-25.

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    Date of creation: Nov 2010
    Date of revision:
    Handle: RePEc:ime:imedps:10-e-25
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