medium · Market Microstructure market-impact
An institutional execution algorithm is configured to minimize implementation shortfall for a highly risk-averse trader (λ_risk to ∞).
What is the characteristic of the resulting optimal execution trajectory according to Almgren-Chriss?
- The algorithm waits for the period of highest historical volume to execute the bulk of the order.
- The algorithm executes the entire order in the first available period to eliminate timing risk.
- The algorithm back-loads the execution, trading more heavily at the end of the day.
- The algorithm distributes the order evenly over the entire time horizon (TWAP).
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