Optimality of VWAP Execution Strategies under General Shaped Market Impact Functions

TL;DR

This paper demonstrates that under a Black-Scholes market model with stochastic clock and large trading volume, the optimal execution strategy for minimizing expected implementation shortfall is a VWAP strategy.

Contribution

It establishes the optimality of VWAP strategies under general shaped market impact functions in a stochastic clock Black-Scholes framework.

Findings

VWAP is optimal under large trading volume and stochastic clock.

Optimal strategy derived for general shaped market impact functions.

Results applicable to Black-Scholes type market models.

Abstract

In this short note, we study an optimization problem of expected implementation shortfall (IS) cost under general shaped market impact functions. In particular, we find that an optimal strategy is a VWAP (volume weighted average price) execution strategy when the market model is a Black-Scholes type with stochastic clock and market trading volume is large.