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Optimal trade execution with unknown drift

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  • Martin Forde

Abstract

We show how existing results for optimal trading strategies with linear temporary price impact, exponential resilience or proportional transaction costs can be easily adapted for the more realistic situation in which the drift of the asset is unknown and we need to project to the observable filtration generated by the asset price process using results from nonlinear filtering theory. In particular, we observe that an arithmetic Brownian motion P with unknown (constant) drift μ is the continuation of a generalized bridge process under ƑP, with the true drift replaced with its unbiased estimate over a fixed time window.

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  • Martin Forde, . "Optimal trade execution with unknown drift," Journal of Risk, Journal of Risk.
    • Handle: RePEc:rsk:journ4:7960628
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