medium · Market Microstructure market-impact
Consider an Almgren-Chriss optimal execution scenario. If a trader's risk aversion parameter λ_risk increases significantly while volatility and impact parameters remain constant, how will the optimal execution trajectory change?
- The trajectory will become more front-loaded to minimize the duration of exposure to price volatility.
- The trajectory will remain unchanged since it is set only by the permanent impact coefficient.
- The trajectory will become more linear, resembling TWAP, so as to minimize market impact costs.
- The trajectory will be back-loaded so the trader can take advantage of closing auction liquidity near the end.
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