David vs Goliath (You against the Markets), A dynamic programming approach to separate the impact and timing of trading costs

Ravi Kashyap

Physica A: Statistical Mechanics and its Applications, 2020, vol. 545, issue C

Abstract: We develop a fundamentally different stochastic dynamic programming model of trading costs. Built on a strong theoretical foundation, our model provides insights to market participants by splitting the overall move of the security price during the duration of an order into the Market Impact (price move caused by their actions) and Market Timing (price move caused by everyone else) components. We derive formulations of this model under different laws of motion of the security prices, starting with a simple benchmark scenario and extending this to include multiple sources of uncertainty, liquidity constraints due to volume curve shifts and relating trading costs to the spread.

Keywords: Trading cost; Market impact; Execution; Zero sum game; Uncertainty; Simulation; Dynamic programming; Stochastic; Bellman equation; Implementation Shortfall (search for similar items in EconPapers)
JEL-codes: C72 D53 D81 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:545:y:2020:i:c:s0378437119316206

DOI: 10.1016/j.physa.2019.122848

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