VWAP Execution as an Optimal Strategy

TL;DR

This paper demonstrates that VWAP is the optimal execution strategy within an extended Almgren-Chriss model that incorporates trading volume, for both risk-neutral and risk-averse traders, with explicit asymptotic solutions.

Contribution

It introduces a trading volume process into the Almgren-Chriss model and proves VWAP's optimality for risk-neutral traders, extending to risk-averse cases with asymptotic analysis.

Findings

VWAP is optimal for risk-neutral traders in the extended model.

Explicit asymptotic expansion for risk-averse traders.

Model integration of trading volume into optimal execution strategies.

Abstract

The volume weighted average price (VWAP) execution strategy is well known and widely used in practice. In this study, we explicitly introduce a trading volume process into the Almgren-Chriss model, which is a standard model for optimal execution. We then show that the VWAP strategy is the optimal execution strategy for a risk-neutral trader. Moreover, we examine the case of a risk-averse trader and derive the first-order asymptotic expansion of the optimal strategy for a mean-variance optimization problem.