Shortermism and excessive risk taking in optimal execution with a target performance

TL;DR

This paper studies optimal trading strategies aiming to reach a performance target while avoiding losses, revealing short-term aggressiveness and long-term dispersion effects.

Contribution

It introduces a model balancing performance barriers and risk, showing how horizon length influences trading aggressiveness and outcome variability.

Findings

Short-term strategies are more aggressive and less risky.

Long-term strategies result in poorer, more dispersed performance.

Performance over different horizons varies significantly.

Abstract

We deal with the optimal execution problem when the broker's goal is to reach a performance barrier avoiding a downside barrier. The performance is provided by the wealth accumulated by trading in the market, the shares detained by the broker evaluated at the market price plus a slippage cost yielding a quadratic inventory cost. Over a short horizon, this type of remuneration leads, at the same time, to a more aggressive and less risky strategy compared to the classical one, and over a long horizon the performance turns to be poorer and more dispersed.