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Single asset optimal trading strategies with stochastic dominance constraints

Author

Listed:
  • Reshma Khemchandani

    (South Asian University)

  • Avikant Bhardwaj

    (Indian Institute of Technology)

  • Suresh Chandra

    (Indian Institute of Technology)

Abstract

In this paper, we develop optimal trading strategies for the risk averse investor by minimizing the expected cost and the risk of execution. We present quadratic programming formulation that includes stochastic dominance constraints to render the preference relationship attitude of both risk neutral and risk averse investors. We also present a cutting plane approach to facilitate computational advantage in solving it. The efficacy of the algorithm is shown with the help of numerical examples.

Suggested Citation

  • Reshma Khemchandani & Avikant Bhardwaj & Suresh Chandra, 2016. "Single asset optimal trading strategies with stochastic dominance constraints," Annals of Operations Research, Springer, vol. 243(1), pages 211-228, August.
    • Handle: RePEc:spr:annopr:v:243:y:2016:i:1:d:10.1007_s10479-014-1697-0
    DOI: 10.1007/s10479-014-1697-0
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    References listed on IDEAS

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    1. Gur Huberman & Werner Stanzl, 2005. "Optimal Liquidity Trading," Review of Finance, European Finance Association, vol. 9(2), pages 165-200.
    2. Bertsimas, Dimitris & Lo, Andrew W., 1998. "Optimal control of execution costs," Journal of Financial Markets, Elsevier, vol. 1(1), pages 1-50, April.
    3. Robert Almgren, 2003. "Optimal execution with nonlinear impact functions and trading-enhanced risk," Applied Mathematical Finance, Taylor & Francis Journals, vol. 10(1), pages 1-18.
    4. Dentcheva, Darinka & Ruszczynski, Andrzej, 2006. "Portfolio optimization with stochastic dominance constraints," Journal of Banking & Finance, Elsevier, vol. 30(2), pages 433-451, February.
    5. Diana Roman & Kenneth Darby-Dowman & Gautam Mitra, 2007. "Mean-risk models using two risk measures: a multi-objective approach," Quantitative Finance, Taylor & Francis Journals, vol. 7(4), pages 443-458.
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    Cited by:

    1. Arti Singh & Dharmaraja Selvamuthu, 2017. "Mean–variance optimal trading problem subject to stochastic dominance constraints with second order autoregressive price dynamics," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 86(1), pages 29-69, August.

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