Execution Risk

Transaction costs in trading involve both risk and return. The return is associated with the cost of immediate execution and the risk is a result of price movements during a more gradual trading. The paper shows that the trade-off between risk and return in optimal execution should reflect the same risk preferences as in ordinary investment. The paper develops models of the joint optimization of positions and trades, and shows conditions under which optimal execution does not depend upon the other holdings in the portfolio. Optimal execution however may involve trades in assets other than those listed in the order; these can hedge the trading risks. The implications of the model for trading with reversals and continuations are developed. The model implies a natural measure of liquidity risk

Measuring and Modeling Execution Cost and Risk

We introduce a new analysis of transaction costs that explicitly recognizes the importance of the timing of execution in assessing transaction costs. Time induces a risk/cost tradeoff. The price of immediacy results in higher costs for quickly executed orders while more gradual trading results in higher risk since the value of the asset can vary more over longer periods of time. We use a novel data set that allows a sequence of transactions to be associated with individual orders and measure and model the expected cost and risk associated with different order execution approaches. The model yields a risk/cost tradeoff that depends upon the state of the market and characteristics of the order. We show how to assess liquidation risk using the notion of liquidation value at risk (LVAR)

Measuring and Modeling Execution Cost and Risk

We introduce a new analysis of transaction costs that explicitly recognizes the importance of the timing of execution in assessing transaction costs. Time induces a risk/cost tradeoff. The price of immediacy results in higher costs for quickly executed orders while more gradual trading results in higher risk since the value of the asset can vary more over longer periods of time. We use a novel data set that allows a sequence of transactions to be associated with individual orders and measure and model the expected cost and risk associated with different order execution approaches. The model yields a risk/cost tradeoff that depends upon the state of the market and characteristics of the order. We show how to assess liquidation risk using the notion of liquidation value at risk (LVAR)

Measuring and Modeling Execution Cost and Risk

We introduce a new analysis of transaction costs that explicitly recognizes the importance of the timing of execution in assessing transaction costs. Time induces a risk/cost tradeoff. The price of immediacy results in higher costs for quickly executed orders while more gradual trading results in higher risk since the value of the asset can vary more over longer periods of time. We use a novel data set that allows a sequence of transactions to be associated with individual orders and measure and model the expected cost and risk associated with different order execution approaches. The model yields a risk/cost tradeoff that depends upon the state of the market and characteristics of the order. We show how to assess liquidation risk using the notion of liquidation value at risk (LVAR)

Measuring and Modeling Execution Cost and Risk

We introduce a new analysis of transaction costs that explicitly recognizes the importance of the timing of execution in assessing transaction costs. Time induces a risk/cost tradeoff. The price of immediacy results in higher costs for quickly executed orders while more gradual trading results in higher risk since the value of the asset can vary more over longer periods of time. We use a novel data set that allows a sequence of transactions to be associated with individual orders and measure and model the expected cost and risk associated with different order execution approaches. The model yields a risk/cost tradeoff that depends upon the state of the market and characteristics of the order. We show how to assess liquidation risk using the notion of liquidation value at risk (LVAR)