Optimal Portfolio Execution Strategies and Sensitivity to Price Impact Parameters

When liquidating a portfolio of large blocks of risky assets, an institutional investor wants to minimize the cost as well as the risk of execution. An optimal execution strategy minimizes a weighted combination of the expected value and the variance of the execution cost, where the weight is given by a nonnegative risk aversion parameter. The execution cost is determined from price impact functions. In particular, a linear price impact model is defined by the temporary impact matrix and the permanent impact matrix , which represent the expected price depression caused by trading assets at a unit rate. In this paper, we analyze the sensitivity of the optimal execution strategy to estimation errors in the impact matrices under a linear price impact model. We show that, instead of depending on and individually, the optimal execution strategy is determined by the combined impact matrix = 1 + T - , where is the time length between consecutive trades. We prove that the minimum expecte...

• Type: Journal
• Year: 2010
• Where: SIAMJO
• Authors: Somayeh Moazeni, Thomas F. Coleman, Yuying Li
• Keywords: Impact Matrix, Optimal Execution Strategy, Permanent Impact Matrix, SIAMJO 2010