Mechanics of good trade execution in the framework of linear temporary market impact
File(s)
Accepted version
Author(s)
Bellani, Claudio
Brigo, Damiano
Type
Journal Article
Abstract
We define the concept of good trade execution and we construct explicit adapted good trade execution strategies in the framework of linear temporary market impact. Good trade execution strategies are dynamic, in the sense that they react to the actual realisation of the traded asset price path over the trading period; this is paramount in volatile regimes, where price trajectories can considerably deviate from their expected value. Remarkably, however, the implementation of our strategies does not require the full specification of an SDE evolution for the traded asset price, making them robust across different models. Moreover, rather than minimising the expected trading cost, good trade execution strategies minimise trading costs in a pathwise sense, a point of view not yet considered in the literature. The mathematical apparatus for such a pathwise minimisation hinges on certain random Young differential equations that correspond to the Euler–Lagrange equations of the classical Calculus of Variations. These Young differential equations characterise our good trade execution strategies in terms of an initial value problem that allows for easy implementations.
Date Issued
2020-09-18
Date Acceptance
2020-08-14
Citation
Quantitative Finance, 2020, 21 (1), pp.143-163
ISSN
1469-7688
Publisher
Routledge
Start Page
143
End Page
163
Journal / Book Title
Quantitative Finance
Volume
21
Issue
1
Copyright Statement
© 2020 Taylor & Francis. This is an Accepted Manuscript of an article published by Taylor & Francis in Quantitative Finance, available online: https://doi.org/10.1080/14697688.2020.1814395
Identifier
https://www.tandfonline.com/doi/full/10.1080/14697688.2020.1814395
Subjects
Social Sciences
Science & Technology
Physical Sciences
Business, Finance
Economics
Mathematics, Interdisciplinary Applications
Social Sciences, Mathematical Methods
Business & Economics
Mathematics
Mathematical Methods In Social Sciences
Quantitative trading strategies
Market microstructure
Quantitative finance
Quantitative finance techniques
01 Mathematical Sciences
14 Economics
15 Commerce, Management, Tourism and Services
Finance
Publication Status
Published
Date Publish Online
2020-09-18