Static Versus Adapted Optimal Execution Strategies in Two Benchmark Trading Models

Damiano Brigo and Clément Piat

Chapter 10 in Innovations in Insurance, Risk- and Asset Management:Proceedings of the Innovations in Insurance, Risk- and Asset Management Conference, 2018, pp 239-273 from World Scientific Publishing Co. Pte. Ltd.

Abstract: We consider the optimal solutions to the trade execution problem in the two different classes of i) fully adapted or adaptive and ii) deterministic or static strategies, comparing them. We do this in two different benchmark models. The first model is a discrete time framework with an information flow process, dealing with both permanent and temporary impact, minimizing the expected cost of the trade. The second model is a continuous time framework where the objective function is the sum of the expected cost and a value at risk (or expected shortfall) type risk criterion. Optimal adapted solutions are known in both frameworks from the original works of Bertsimas and Lo (1998) and Gatheral and Schied (2011). In this paper we derive the optimal static strategies for both benchmark models and we study quantitatively the improvement in optimality when moving from static strategies to fully adapted ones. We conclude that, in the benchmark models we study, the difference is not relevant, except for extreme unrealistic cases for the model or impact parameters.

Keywords: Insurance; Actuarial Science; Risk Measure; Reinsurance; Copula; Replicating Portfolio; Bayesian Finance; Risk Classification; Stochastic Dominance; Dynamic Hedging; Autoregressive Hidden Markov Models; Exchange-Traded Funds; Uncertainty Quantification; Fixed Income; Stochastic Processes for Finance (search for similar items in EconPapers)
JEL-codes: G22 G32 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (3)

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