Optimal Execution Strategy: An Agent-based Approach

Document Type : Research Paper

Authors

1 Assistant Prof. in Financial Engineering, Faculty of Industrial Engineering, Tarbiat Modares University, Tehran, Iran

2 M.Sc. in Financial Engineering, Faculty of Financial Science, Kharazmi University, Tehran, Iran

Abstract

Investors who want to execute large orders always have to trade-off between price effect and opportunity cost. The purpose of this research is to investigate an optimal way to execute such orders. In this research we consider the possibility of order types and the optimal trading strategy based on the volume weighted average price (VWAP), using historical data of a share in Tehran Stock Exchange. In the simulated trading market, we also consider the price effect for large orders. The results show that for a large order on buy-side, execution strategy adopting multiple order types can perform better than those using single order type. The optimal strategy has managed to reduce the volume weighted average price (transaction costs) by 0.137 percent compared to the market.

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Main Subjects

References

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Financial Research Journal
Volume 19, Issue 2
2017
Pages 262-239

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