medium · Market Microstructure market-impact
An Almgren-Chriss optimizer is calibrated for a trader with risk-aversion parameter lambda = 0.001 (in units of cost per share-squared). The optimizer determines that trading 500,000 shares over 5 days minimizes the sum of expected market impact and timing risk.
If the trader's risk aversion doubles to lambda = 0.002 while the stock's volatility and liquidity parameters remain unchanged, what is the most likely change to the optimal execution schedule?
- The trader slows execution, spreading shares over roughly 10 days instead of 5, which cuts temporary market impact costs incurred within each trading period.
- The trader accelerates execution, concentrating more shares in earlier periods to reduce exposure to price-volatility risk, accepting higher temporary impact costs.
- The optimal schedule stays exactly the same, since risk aversion only shifts the cost function's constant intercept term, never the slope of the optimal trajectory itself.
- The trader abandons the Almgren-Chriss framework entirely for a plain, constant-rate TWAP schedule, since the model supposedly stops applying once risk aversion rises this high.
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