TY - JOUR
T1 - Optimal Execution and Alpha Capture
JF - The Journal of Trading
SP - 48
LP - 56
DO - 10.3905/jot.2012.7.2.048
VL - 7
IS - 2
AU - Criscuolo, Adriana M.
AU - Waelbroeck, Henri
Y1 - 2012/03/31
UR - http://jot.pm-research.com/content/7/2/48.abstract
N2 - A third wave of technological change known as “alpha profiling” is taking root at the institutional trading desk. Traders submit orders to prediction models that estimate the relative probability of various price scenarios. Traders can use this information to select an execution strategy or allow the model to propose an optimal execution schedule. A consistent implementation of the optimal schedule for each alpha profile increases alpha capture in the same way that statistical arbitrage generates trading profits. In this article, the authors present a model to estimate how the expected implementation shortfall depends on the alpha profile and implementation schedule. They use this model to compute an optimal execution strategy given the alpha profile of an order. They show examples of optimal execution schedules for typical alpha profiles. The authors also discuss the accuracy of alpha profiling and estimate the potential to reduce the imple men tation shortfall by applying this methodology for a typical port folio manager.TOPICS: Statistical methods, equity portfolio management, risk management
ER -