A Hamilton-Jacobi-Bellman approach to optimal trade execution |
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Authors: | Peter A. Forsyth |
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Affiliation: | David R. Cheriton School of Computer Science, University of Waterloo, Waterloo, ON, Canada N2L 3G1 |
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Abstract: | The optimal trade execution problem is formulated in terms of a mean-variance tradeoff, as seen at the initial time. The mean-variance problem can be embedded in a linear-quadratic (LQ) optimal stochastic control problem. A semi-Lagrangian scheme is used to solve the resulting nonlinear Hamilton-Jacobi-Bellman (HJB) PDE. This method is essentially independent of the form for the price impact functions. Provided a strong comparison property holds, we prove that the numerical scheme converges to the viscosity solution of the HJB PDE. Numerical examples are presented in terms of the efficient trading frontier and the trading strategy. The numerical results indicate that in some cases there are many different trading strategies which generate almost identical efficient frontiers. |
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Keywords: | Optimal execution Mean-variance tradeoff HJB equation Semi-Lagrangian discretization Viscosity solution |
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