medium · Quantitative Finance microstructure-arb
In the Almgren-Chriss framework for optimal execution, a trader faces a trade-off between permanent and temporary price impact.
If the trader increases their risk aversion λ, what is the effect on the execution trajectory?
- The trader will execute faster to reduce timing risk.
- The trader will execute more slowly to minimize market impact.
- The trajectory becomes perfectly linear to balance risk and cost.
- The risk aversion parameter only affects the terminal price, not the trajectory.
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