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Optimal trading execution with nonlinear market impact: an alternative solution method

By Marzo Massmiliano, Ritelli Daniele and Zagaglia Paolo

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.

Topics: G11 - Portfolio Choice; Investment Decisions, G12 - Asset Pricing; Trading volume; Bond Interest Rates
Year: 2011
DOI identifier: 10.2139/ssrn.1964660
OAI identifier: oai:mpra.ub.uni-muenchen.de:35393

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