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VWAP Execution as an Optimal Strategy

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  • Takashi Kato

Abstract

The volume weighted average price (VWAP) execution strategy is well known and widely used in practice. In this study, we explicitly introduce a trading volume process into the Almgren-Chriss model, which is a standard model for optimal execution. We then show that the VWAP strategy is the optimal execution strategy for a risk-neutral trader. Moreover, we examine the case of a risk-averse trader and derive the first-order asymptotic expansion of the optimal strategy for a mean-variance optimization problem.

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  • Takashi Kato, 2014. "VWAP Execution as an Optimal Strategy," Papers 1408.6118, arXiv.org, revised Jan 2017.
    • Handle: RePEc:arx:papers:1408.6118
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    References listed on IDEAS

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    1. Takashi Kato, 2009. "An Optimal Execution Problem with Market Impact," Papers 0907.3282, arXiv.org, revised Dec 2014.
    2. Takashi Kato, 2014. "An optimal execution problem with market impact," Finance and Stochastics, Springer, vol. 18(3), pages 695-732, July.
    3. Konishi, Hizuru, 2002. "Optimal slice of a VWAP trade," Journal of Financial Markets, Elsevier, vol. 5(2), pages 197-221, April.
    4. Bertsimas, Dimitris & Lo, Andrew W., 1998. "Optimal control of execution costs," Journal of Financial Markets, Elsevier, vol. 1(1), pages 1-50, April.
    5. Takashi Kato, 2011. "An Optimal Execution Problem with a Geometric Ornstein-Uhlenbeck Price Process," Papers 1107.1787, arXiv.org, revised Jul 2014.
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