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Optimal and equilibrium execution strategies with generalized price impact.
- Source :
-
Quantitative Finance . Oct2020, Vol. 20 Issue 10, p1625-1644. 20p. - Publication Year :
- 2020
-
Abstract
- This paper examines the execution problems of large traders with a generalized price impact. Constructing two related models in a discrete-time setting, we solve these problems by applying the backward induction method of dynamic programming. In the first problem, we formulate the expected utility maximization problem of a single large trader as a Markov decision process and derive an optimal execution strategy. Then, in the second model, we formulate the expected utility maximization problem of two large traders as a Markov game and derive an equilibrium execution strategy at a Markov perfect equilibrium. Both of these two models enable us to investigate how the execution strategies and trade performances of a large trader are affected by the existence of other traders. Moreover, we find that these optimal and equilibrium execution strategies become deterministic when the total execution volumes of non-large traders are deterministic. We also show, by some numerical examples, the comparative statics results with respect to several problem parameters. [ABSTRACT FROM AUTHOR]
- Subjects :
- *EXPECTED utility
*EQUILIBRIUM
*DYNAMIC programming
*MARKOV processes
Subjects
Details
- Language :
- English
- ISSN :
- 14697688
- Volume :
- 20
- Issue :
- 10
- Database :
- Academic Search Index
- Journal :
- Quantitative Finance
- Publication Type :
- Academic Journal
- Accession number :
- 146083322
- Full Text :
- https://doi.org/10.1080/14697688.2020.1749294