NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Execution Risk

Robert Engle, Robert Ferstenberg

NBER Working Paper No. 12165
Issued in April 2006
NBER Program(s):   AP

Transaction costs in trading involve both risk and return. The return is associated with the cost of immediate execution and the risk is a result of price movements during a more gradual trading. The paper shows that the trade-off between risk and return in optimal execution should reflect the same risk preferences as in ordinary investment. The paper develops models of the joint optimization of positions and trades, and shows conditions under which optimal execution does not depend upon the other holdings in the portfolio. Optimal execution however may involve trades in assets other than those listed in the order; these can hedge the trading risks. The implications of the model for trading with reversals and continuations are developed. The model implies a natural measure of liquidity risk

download in pdf format
   (204 K)

email paper

This paper is available as PDF (204 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w12165

Published: Engle, Robert and Robert Ferstenberg. “Execution Risk.” Journal of Portfolio Management 33, 2 (Winter 2007): 34-45.

Users who downloaded this paper also downloaded these:
Garleanu and Pedersen w15205 Dynamic Trading with Predictable Returns and Transaction Costs
Engle and Gallo w10117 A Multiple Indicators Model for Volatility Using Intra-Daily Data
Obizhaeva and Wang w11444 Optimal Trading Strategy and Supply/Demand Dynamics
Cipollini, Engle, and Gallo t0331 Vector Multiplicative Error Models: Representation and Inference
Khandani and Lo w14465 What Happened To The Quants In August 2007?: Evidence from Factors and Transactions Data
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us