Optimal portfolio execution under cointegrated vector autoregressive systems

Abstract

In this paper, an optimal portfolio execution problem under price model which exhibits cointegration behaviour is proposed. The proposed problem is formulated as a quadratic programming problem. With different statistical procedures and parameter estimation methods, employed on real market financial data, the four portfolios are constructed with which, computational study is performed. It is shown that the trading strategies constructed out of portfolios with cointegrated price dynamics show significant reduction in execution cost.

Keywords:

• Portfolio execution
• execution cost
• vector autoregressive process
• cointegration
• future contract

Acknowledgements

Author is thankful to Prof. Suresh Chandra and Prof. S. Dharmaraja, Department of Mathematics, Indian Institute of Technology Delhi, for their valuable suggestions and continuous encouragement during the preparation of this manuscript. Moreover, author acknowledges the two referees whose comments and suggestions have helped to improve the paper to a great extent.

Notes

No potential conflict of interest was reported by the authors