2012/10/29 by Olivier Guéant, Guéant, Olivier
Decision Sciences · Economics, Econometrics and Finance · #Economic theories and models #FOS: Economics and business #Financial Markets and Investment Strategies #Risk and Portfolio Optimization #Statistical Finance (q-fin.ST) #Stochastic processes and financial applications #Stock Market Forecasting Methods #Trading and Market Microstructure (q-fin.TR)
paper · pdf · doi:10.48550/arxiv.1210.7608
openalex publication_date 2012/10/29 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28
When executing their orders, investors are proposed different strategies by brokers and investment banks. Most orders are executed using VWAP algorithms. Other basic execution strategies include POV (also called PVol) -- for percentage of volume --, IS -- implementation shortfall -- or Target Close. In this article dedicated to POV strategies, we develop a liquidation model in which a trader is constrained to liquidate a portfolio with a constant participation rate to the market. Considering the functional forms commonly used by practitioners for market impact functions, we obtain a closed-form expression for the optimal participation rate. Also, we develop a microfounded risk-liquidity premium that permits to better assess the costs and risks of execution processes and to give a price to a large block of shares. We also provide a thorough comparison between IS strategies and POV strategies in terms of risk-liquidity premium.