Optimal Trading Execution with Nonlinear Market Impact: An Alternative Solution Method

Massimiliano Marzo, Daniele Ritelli and Paolo Zagaglia

Working Paper series from Rimini Centre for Economic Analysis

Abstract: We consider the optimal trade execution strategies for a large portfolio of single stocks proposed by Almgren (2003). This framework accounts for a nonlinear impact of trades on average market prices. The results of Almgren (2003) are based on the assumption that no shares of assets per unit of time are trade at the beginning of the period. We propose a general solution method that accomodates the case of a positive stock of assets in the initial period. Our findings are twofold. First of all, we show that the problem admits a solution with no trading in the opening period only if additional parametric restrictions are imposed. Second, with positive asset holdings in the initial period, the optimal execution time depends on trading activity at the beginning of the planning period.

Keywords: optimal execution; market impact; ordinary differential equations (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2011-11
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Working Paper: Optimal Trading Execution with Nonlinear Market Impact: An Alternative Solution Method (2011)
Working Paper: Optimal Trading Execution with Nonlinear Market Impact: An Alternative Solution Method (2011)
Working Paper: Optimal trading execution with nonlinear market impact: an alternative solution method (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:rim:rimwps:52_11

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