Smoothing and parametric rules for stochastic mean-CVaR optimal execution strategy

Somayeh Moazeni (), Thomas F. Coleman () and Yuying Li ()
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Somayeh Moazeni: Princeton University
Thomas F. Coleman: University of Waterloo
Yuying Li: University of Waterloo

Annals of Operations Research, 2016, vol. 237, issue 1, No 6, 99-120

Abstract: Abstract Computing optimal stochastic portfolio execution strategies under an appropriate risk consideration presents many computational challenges. Using Monte Carlo simulations, we investigate an approach based on smoothing and parametric rules to minimize mean and Conditional Value-at-Risk (CVaR) of the execution cost. The proposed approach reduces computational complexity by smoothing the nondifferentiability arising from the simulation discretization and by employing a parametric representation of a stochastic strategy. We further handle constraints using a smoothed exact penalty function. Using the downside risk as an example, we show that the proposed approach can be generalized to other risk measures. In addition, we computationally illustrate the effect of including risk on the stochastic optimal execution strategy.

Keywords: Optimal execution; Computational stochastic programming; Dynamic programming; Penalty functions (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (4)

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DOI: 10.1007/s10479-013-1391-7

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