VWAP execution and guaranteed VWAP

TL;DR

This paper develops a comprehensive model for pricing guaranteed VWAP contracts considering market impact and execution costs, addressing a gap in the literature on VWAP strategies and contract pricing.

Contribution

It introduces a novel framework for pricing guaranteed VWAP contracts that incorporates permanent market impact and execution costs, extending prior VWAP research.

Findings

Model effectively captures market impact effects

Numerical methods enable practical contract pricing

Highlights differences between agency VWAP and guaranteed VWAP

Abstract

Optimal liquidation using VWAP strategies has been considered in the literature, though never in the presence of permanent market impact and only rarely with execution costs. Moreover, only VWAP strategies have been studied and the pricing of guaranteed VWAP contracts has never been addressed. In this article, we develop a model to price guaranteed VWAP contracts in a general framework for market impact and we highlight the differences between an agency VWAP and a guaranteed VWAP contract. Numerical methods and applications are also provided.