Comparison Between the Mean-Variance Optimal and the Mean-Quadratic-Variation Optimal Trading Strategies

Tse, Shu Tong; Kennedy, J. S.; Windcliff, H.

doi:10.1080/1350486x.2012.755817

Cited by 32 publications

(31 citation statements)

References 26 publications

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“…A reasonable assumption is that the largest source of uncertainty arises from the stochastic integral part. Lozenz and Almgren (2011) and Tse et al (2013) argued that the terms in the drift part are small compared with market dynamics, which we verified numerically in our case.…”

Section: The Optimal Execution Strategy Significantly Depends On the supporting

confidence: 70%

Managing investment and liquidity risks for derivatives within a market impact perspective

Kalife¹

2017

Insurance Markets and Companies

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The recent period has experienced many instances when market volatility suddenly increased even when there were no well-known fundamental catalysts, as illustrated by the short-lived but sharp transitions from low volatility to high volatility, as many in the last six years as we have had in the prior two decades ‒ increasing evidence that we are in a new volatility-of-volatility regime. Fundamentally, market impact is an illustration of market inefficiency: theories of efficient markets typically expect that investors buy and sell assets based on assessments of their intrinsic value, in contrast with large derivative players who often act based on market price movements which may not be linked to fundamentals. Market impact risk refers to the degree to which large size transactions can be carried out in a timely fashion with a minimal impact on prices. As a result, managing investment and liquidity risks for large players requires introducing an explicit market impact function, and applying to derivatives significantly depends on whether there is or not significant delta hedging activity: in case of no significant delta hedging activity, the risk appetite has significant influence on the optimal execution strategy, while in case of significant delta hedging activity the optimal trading involves feedback hedging effects translating into a modified Black ‒ Scholes hedging strategy.

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Section: The Optimal Execution Strategy Significantly Depends On the supporting

confidence: 70%

Managing investment and liquidity risks for derivatives within a market impact perspective

Kalife¹

2017

Insurance Markets and Companies

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“…In other words, the above 499 simplification serendipitously happens to work when risk is measured by quadratic variation. This illustrates 500 that quadratic variation and variance are different risk measures that lead to different optimal strategies, as 501 we point out in Section 5.1 and elaborated in (Tse et al, 2011).…”

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confidence: 99%

“…We emphasize, however, that this an over-497 simplification that is not true in general. When risk is measured by variance, instead of quadratic variation, 498 being aggressive in the money can reduce risk substantially (Tse et al, 2011). In other words, the above 499 simplification serendipitously happens to work when risk is measured by quadratic variation.…”

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confidence: 99%

Optimal trade execution: A mean quadratic variation approach

Forsyth

Kennedy

Tse

et al. 2012

Journal of Economic Dynamics and Control

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141

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“…can be regarded as a measure for the risk associated with holding the position X ξ t at time t; see [2,15,27] and the discussion in Section 1.2 of [24]. Similarly, the expectation of the term (S T )|X ξ T | p can be viewed as a penalty for still keeping the position X ξ T at the end of the trading horizon.…”

Section: Statement Of Resultsmentioning

confidence: 99%

Optimal portfolio liquidation in target zone models and catalytic superprocesses

Neuman

Schied

2015

Finance Stoch

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We study optimal buying and selling strategies in target zone models. In these models the price is modeled by a diffusion process which is reflected at one or more barriers. Such models arise for example when a currency exchange rate is kept above a certain threshold due to central bank intervention. We consider the optimal portfolio liquidation problem for an investor for whom prices are optimal at the barrier and who creates temporary price impact. This problem will be formulated as the minimization of a cost-risk functional over strategies that only trade when the price process is located at the barrier. We solve the corresponding singular stochastic control problem by means of a scaling limit of critical branching particle systems, which is known as a catalytic superprocess. In this setting the catalyst is a set of points which is given by the barriers of the price process. For the cases in which the unaffected price process is a reflected arithmetic or geometric Brownian motion with drift, we moreover give a detailed financial justification of our cost functional by means of an approximation with discrete-time models.Mathematics Subject Classification 2010: 60J80, 60J85, 93E20, 60H20, 60H30, 91G80.

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Comparison Between the Mean-Variance Optimal and the Mean-Quadratic-Variation Optimal Trading Strategies

Cited by 32 publications

References 26 publications

Managing investment and liquidity risks for derivatives within a market impact perspective

Managing investment and liquidity risks for derivatives within a market impact perspective

Optimal trade execution: A mean quadratic variation approach

Optimal portfolio liquidation in target zone models and catalytic superprocesses

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