TY  - JOUR
AU  - Engle,Robert
AU  - Ferstenberg,Robert
TI  - Execution Risk
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12165
PY  - 2006
Y2  - April 2006
UR  - http://www.nber.org/papers/w12165
L1  - http://www.nber.org/papers/w12165.pdf
N1  - Author contact info:
Robert F. Engle, III
Department of Finance, Stern School of Business
New York University, Salomon Center
44 West 4th Street, Suite 9-160
New York, NY  10012-1126
Tel: 212/998-0710
Fax: 212/995-4220
E-Mail: rengle@stern.nyu.edu

Robert Ferstenberg
Morgan Stanley
E-Mail: Robert.Ferstenberg@morganstanley.com
AB  - 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
ER  -