Optimal trade execution under displaced diffusions dynamics across different risk criteria

Damiano Brigo and Giuseppe Di Graziano ()
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Giuseppe Di Graziano: Department of Mathematics, Imperial College London, UK;

Journal of Financial Engineering (JFE), 2014, vol. 01, issue 02, 1-17

Abstract: We solve a version of the optimal trade execution problem when the mid asset price follows a displaced diffusion (DD). Optimal strategies in the adapted class under various risk criteria, namely value-at-risk (VaR), expected shortfall (ES) and a new criterion called squared asset expectation (SAE), related to a version of the cost variance measure, are derived and compared. It is well known that DDs exhibit dynamics that are in-between arithmetic Brownian motions (ABM) and geometric Brownian motions (GBM) depending of the choice of the shift parameter. Furthermore, DD allows for changes in the support of the mid asset price distribution, allowing one to include a minimum permitted value for the mid price, either positive or negative. We study the dependence of the optimal solution on the choice of the risk aversion criterion. Optimal solutions across criteria and asset dynamics are comparable although differences are not negligible for high levels of risk aversion and low market impact assets. This is illustrated with numerical examples.

Keywords: Optimal trade execution; algorithmic trading; displaced diffusion; HJB equation; calculus of variations; risk measures; value at risk; expected shortfall; squared-asset expectation; market impact (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (6)

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DOI: 10.1142/S2345768614500184

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