Efficient trading frontier: a shortage function approach

Abstract

In this paper, we propose a nonparametric efficiency-based approach for the optimal trading strategy that trades off the execution risk with that of the execution cost. A shortage function is defined that looks for possible decrease in the execution cost as well as decreases in the execution risk. Global optimality is guaranteed for the resulting optimal trading strategy. An empirical section on a small sample of assets serves as an illustration.

Keywords:

• shortage function
• efficient trading frontier
• risk aversion
• quadratic programming

AMS Subject Classifications:

• 90C20
• 90C39
• 90C90

Acknowledgments

The authors would like to thank the reviewers and editor for their comments and suggestions, which have helped to improve the manuscript considerably. They would also like to thank Vipul Nirwani and Sameer Jain for their contribution while preparing the manuscript.