Optimal control of execution costs

by: Dimitris Bertsimas, Andrew W Lo

Journal of Financial Markets, Vol. 1, No. 1. (30 April 1998), pp. 1-50.

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Abstract

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 of shares to be executed within a fixed finite number of periods T, 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 cases - that minimizes the expected cost of executing within T 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.

@article{bertsimas_1998, abstract = {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 of shares to be executed within a fixed finite number of periods T, 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 cases - that minimizes the expected cost of executing within T 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.}, author = {Bertsimas, Dimitris and Lo, Andrew W. }, citeulike-article-id = {2775209}, doi = {http://dx.doi.org/10.1016/S1386-4181(97)00012-8}, journal = {Journal of Financial Markets}, keywords = {optimal-trading}, month = {April}, number = {1}, pages = {1--50}, posted-at = {2008-05-09 11:40:29}, priority = {2}, title = {Optimal control of execution costs}, url = {http://dx.doi.org/10.1016/S1386-4181(97)00012-8}, volume = {1}, year = {1998} }

RIS record

TY - JOUR ID - bertsimas_1998 L3 - citeulike-article-id:2775209 TI - Optimal control of execution costs JF - Journal of Financial Markets VL - 1 IS - 1 SP - 1 EP - 50 N2 - 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 of shares to be executed within a fixed finite number of periods T, 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 cases - that minimizes the expected cost of executing within T 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. KW - optimal-trading AU - Bertsimas, Dimitris AU - Lo, Andrew PY - 1998/04/30/ UR - http://dx.doi.org/10.1016/S1386-4181(97)00012-8 ER -

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