Execution and Block Trade Pricing with Optimal Constant Rate of Participation - Journal of Mathematical Finance

JMF > Vol.4 No.4, August 2014

Journal of Mathematical Finance

Volume 4, Issue 4 (August 2014)

ISSN Print: 2162-2434 ISSN Online: 2162-2442

Google-based Impact Factor: 0.87 Citations h5-index & Ranking

Execution and Block Trade Pricing with Optimal Constant Rate of Participation ()

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DOI: 10.4236/jmf.2014.44023 3,732 Downloads 5,116 Views Citations

Author(s)

Olivier Guéant

Affiliation(s)

Université Paris-Diderot, Paris, France.

ABSTRACT

When executing their orders, different strategies are proposed to investors by brokers and investment banks. Most orders are executed using VWAP algorithms. Other basic execution strategies include POV (also called PVol)—for percentage of volume, IS—Implementation Shortfall, or Target Close. In this article dedicated to POV strategies, we develop a liquidation model in which a trader is constrained to liquidate a portfolio with a constant participation rate to the market. Considering the functional forms commonly used by practitioners for market impact functions, we obtain a closed-form expression for the optimal participation rate. Also, we develop a micro-founded risk-liquidity premium that allows better assessing the costs and risks of execution processes and giving a price to a large block of shares. We also provide a thorough comparison between IS strategies and POV strategies in terms of risk-liquidity premium.

KEYWORDS

Optimal Execution, Optimal Liquidation, High-Frequency Trading

Share and Cite:

Guéant, O. (2014) Execution and Block Trade Pricing with Optimal Constant Rate of Participation. Journal of Mathematical Finance, 4, 255-264. doi: 10.4236/jmf.2014.44023.

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