Statistical Methods in Finance 2017

Dec 16 - 19, 2017


Abstract

Optimizing Execution Cost Using Stochastic Control

by Akshay Bansal

In this work, we devise an optimal trading strategy that minimizes the expected investment cost to trade a given block of shares in a fixed time duration using discrete-time Stochastic Control theory for two different market models. The market model-I (MM-I) which allows an instant execution of market orders has been analyzed using a generalized geometric motion of stock price for two different cost functions where the first function involves just the fiscal cost while the cost function of the second kind incorporates market risks along with fiscal cost. Subsequently, we re-analyzed the delayed execution model (MM-II) proposed by Bertsimas & Lo, 1998 using this generalized geometric framework and compared the performance of the resulting polices with Bertsimas' strategy using the available stock price data.