Optimal trading: The importance of being adaptive

Claudio Bellani, Damiano Brigo, Alex Done and Eyal Neuman
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Claudio Bellani: Department of Mathematics, Imperial College, London, United Kingdom
Alex Done: Department of Mathematics, Imperial College, London, United Kingdom
Eyal Neuman: Department of Mathematics, Imperial College, London, United Kingdom†CFM-Imperial College Institute, London, United Kingdom

International Journal of Financial Engineering (IJFE), 2021, vol. 08, issue 04, 1-18

Abstract: We compare optimal static and dynamic solutions in trade execution. An optimal trade execution problem is considered where a trader is looking at a short-term price predictive signal while trading. When the trader creates an instantaneous market impact, it is shown that transaction costs of optimal adaptive strategies are substantially lower than the corresponding costs of the optimal static strategy. In the same spirit, in the case of transient impact, it is shown that strategies that observe the signal a finite number of times can dramatically reduce the transaction costs and improve the performance of the optimal static strategy.

Keywords: Optimal execution; market impact; optimal portfolio liquidation; dynamic strategies; static strategies; predictive signals; trading with signals; dynamic vs. static strategies; optimal stochastic control (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1142/S242478632050022X

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