medium · Quantitative Finance microstructure-arb
If the daily volatility σ of a stock increases, how does the Almgren-Chriss model suggest the optimal trading trajectory should change for a risk-averse trader?
- The trajectory is unchanged, since volatility enters only the variance term and not expected impact cost at all.
- The trader should switch entirely to passive execution using resting limit orders instead of market orders.
- The trader should slow down execution to let the added price noise average out over a longer horizon.
- The trader should accelerate execution (front-load more aggressively) to reduce exposure to the higher volatility.
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