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Dynamic Trading Policies With Price Impact

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  • Hua He
  • Harry Mamaysky

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

Suggested Citation

  • Hua He & Harry Mamaysky, 2001. "Dynamic Trading Policies With Price Impact," Yale School of Management Working Papers ysm244, Yale School of Management, revised 01 Jan 2002.
  • Handle: RePEc:ysm:somwrk:ysm244
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    File URL: http://icfpub.som.yale.edu/publications/2420
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    References listed on IDEAS

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    1. 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.
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    5. 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 407-431.
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    8. Ajay Subramanian & Robert A. Jarrow, 2001. "The Liquidity Discount," Mathematical Finance, Wiley Blackwell, vol. 11(4), pages 447-474, October.
    9. Bertsimas, Dimitris & Lo, Andrew W., 1998. "Optimal control of execution costs," Journal of Financial Markets, Elsevier, vol. 1(1), pages 1-50, April.
    10. Dimitri Vayanos, 2001. "Strategic Trading in a Dynamic Noisy Market," Journal of Finance, American Finance Association, vol. 56(1), pages 131-171, February.
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    Cited by:

    1. Daniel Hern'andez-Hern'andez & Harold A. Moreno-Franco & Jos'e Luis P'erez, 2017. "Periodic strategies in optimal execution with multiplicative price impact," Papers 1705.00284, arXiv.org, revised May 2018.
    2. Olivier Guéant & Charles-Albert Lehalle, 2015. "General Intensity Shapes In Optimal Liquidation," Mathematical Finance, Wiley Blackwell, vol. 25(3), pages 457-495, July.
    3. 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(4), pages 1077-1110, August.
    4. Obizhaeva, Anna A. & Wang, Jiang, 2013. "Optimal trading strategy and supply/demand dynamics," Journal of Financial Markets, Elsevier, vol. 16(1), pages 1-32.
    5. Urban J. Jermann & Vincenzo Quadrini, 2006. "Financial innovations and macroeconomic volatility," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
    6. Yamane, Fumihiro, 2010. "Estimation of Consumer Welfare Change from the Revision of Age Criterion for BSE Testing: Hypothetical Revealed Preference Method Using Monitoring Survey Data," Japanese Journal of Rural Economics, Agricultural Economics Society of Japan (AESJ), vol. 12, pages 1-19.
    7. Kraft, Holger & Kühn, Christoph, 2011. "Large traders and illiquid options: Hedging vs. manipulation," Journal of Economic Dynamics and Control, Elsevier, vol. 35(11), pages 1898-1915.
    8. Takashi Kato, 2011. "An Optimal Execution Problem with a Geometric Ornstein-Uhlenbeck Price Process," Papers 1107.1787, arXiv.org, revised Jul 2014.
    9. Taylor, Nick, 2016. "Roll strategy efficiency in commodity futures markets," Journal of Commodity Markets, Elsevier, vol. 1(1), pages 14-34.
    10. 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.
    11. repec:eee:dyncon:v:101:y:2019:i:c:p:211-238 is not listed on IDEAS
    12. Torsten Schöneborn, 2016. "Adaptive basket liquidation," Finance and Stochastics, Springer, vol. 20(2), pages 455-493, April.
    13. repec:taf:quantf:v:17:y:2017:i:8:p:1147-1157 is not listed on IDEAS
    14. repec:eee:phsmap:v:490:y:2018:i:c:p:1228-1237 is not listed on IDEAS
    15. Way, Rupert & Lafond, François & Lillo, Fabrizio & Panchenko, Valentyn & Farmer, J. Doyne, 2019. "Wright meets Markowitz: How standard portfolio theory changes when assets are technologies following experience curves," Journal of Economic Dynamics and Control, Elsevier, vol. 101(C), pages 211-238.
    16. repec:eee:dyncon:v:101:y:2019:i:c:p:17-40 is not listed on IDEAS
    17. repec:spr:joptap:v:173:y:2017:i:1:d:10.1007_s10957-016-1040-9 is not listed on IDEAS
    18. Fabien Guilbaud & Mohamed Mnif & Huy^en Pham, 2010. "Numerical methods for an optimal order execution problem," Papers 1006.0768, arXiv.org.
    19. Takashi Kato, 2014. "An optimal execution problem with market impact," Finance and Stochastics, Springer, vol. 18(3), pages 695-732, July.
    20. 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.
    21. Rongju Zhang & Nicolas Langren'e & Yu Tian & Zili Zhu & Fima Klebaner & Kais Hamza, 2016. "Dynamic portfolio optimization with liquidity cost and market impact: a simulation-and-regression approach," Papers 1610.07694, arXiv.org, revised Jun 2019.
    22. Hillert, Alexander & Maug, Ernst & Obernberger, Stefan, 2016. "Stock repurchases and liquidity," Journal of Financial Economics, Elsevier, vol. 119(1), pages 186-209.
    23. 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.
    24. Sergey Isaenko & Rui Zhong, 2015. "Liquidity premium in the presence of stock market crises and background risk," Quantitative Finance, Taylor & Francis Journals, vol. 15(1), pages 79-90, January.
    25. repec:dau:papers:123456789/7391 is not listed on IDEAS

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