We derive dynamic optimal trading strategies that minimize the expected cost of trading a large block of equity over a fixed time horizon. Specifically, given a fixed block SM of shares to be executed within a fixed finite number of periods ¹, and given a price-impact function that yields the execution price of an individual trade as a function of the shares traded and market conditions, we obtain the optimal sequence of trades as a function of market conditions -closed-form expressions in some casesthat minimizes the expected cost of executing SM within ¹ periods. Our analysis is extended to the portfolio case in which price impact across stocks can have an important effect on the total cost of trading a portfolio. 1998 Elsevier Science B.V. All rights reserved. JEL classification: G23
Optimal trading strategies with the purpose to minimize expected costs when trading large block orders over a fixed time period are also derived in REF .
Optimal control of execution costs
JOURNAL OF FINANCIAL MARKETS 1 (1998) 1—50
Economics