Calibration of optimal execution of financial transactions in the presence of transient market impact

Fabrizio Lillo, Enzo Busseti, Fabrizio Lillo, Enzo Busseti

Risultato della ricerca: Article

4 Citazioni (Scopus)

Abstract

Trading large volumes of a nancial asset in order driven marketsrequires the use of algorithmic execution dividing the volume into manytransactions in order to minimize costs due to market impact. A proper designof an optimal execution strategy strongly depends on a careful modeling ofmarket impact, i.e. how the price reacts to trades. In this paper we consider arecently introduced market impact model (Bouchaud et al 2004 Quant. Finance,4 176{90), which has the property of describing both the volume and the temporaldependence of price change due to trading. We show how this model can be usedto describe price impact also in aggregated trade time or in real time. We thensolve analytically and calibrate with real data the optimal execution problemboth for risk neutral and for risk averse investors and we derive an e cientfrontier of optimal execution. When we include spread costs the problem must besolved numerically and we show that the introduction of such costs regularizesthe solution.
Lingua originaleEnglish
pagine (da-a)P09010-
Numero di pagine29
RivistaJournal of Statistical Mechanics: Theory and Experiment
Volume2012
Stato di pubblicazionePublished - 2012

All Science Journal Classification (ASJC) codes

  • Statistical and Nonlinear Physics
  • Statistics and Probability
  • Statistics, Probability and Uncertainty

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