When liquidating a portfolio of large blocks of risky assets, an institutional investor wants to minimize the cost as well as the risk of execution. An optimal execution strategy minimizes a weighted combination of the expected value and the variance of the execution cost, where the weight is given by a nonnegative risk aversion parameter. The execution cost is determined from price impact func...

1 What is price impact? Price impact refers to the correlation between an incoming order (to buy or to sell) and the subsequent price change. That a buy trade should push the price up seems at first sight obvious and is easily demonstrated empirically, as we will review below. It is also a dour reality for traders for whom price impact is tantamount to a cost: their second buy trade is on avera...

Large institutional investors dominate many financial markets. This paper develops a consumption-based model of markets in which all institutional traders recognize their impact on prices. Bilateral (buyer and seller) market power changes efficiency and arbitrage properties of equilibrium. Predictions match temporary and permanent price effects of supply shocks, order breakup, limits to arbitra...

In the execution cost problem, an investor wants to minimize the total expected cost and risk in the execution of a portfolio of risky assets to achieve desired positions. A major source of the execution cost comes from price impacts of both the investor’s own trades and other concurrent institutional trades. Indeed price impact of large trades have been considered as one of the main reasons fo...

11’ HE quadrupling of OPEC oil prices in late 1973 and early 1974 had a profound and permanent impact on the U.S. economy. The initial impact was an explosion in the prices of most goods and services, as well as the longest and most severe decline in national output since the 1930s. The recession trough occurred over two years ago and the rate of inflation has fallen substantially since 1974. W...

The theory of demand and supply implies a positive relationship, or ‘‘price transmission’’ between the prices of products at different stages of manufacturing. This relationship was investigated with quarterly prices of softwood stumpage in the US South, and national prices of forest products, from 1977 to 2002. All prices, net of inflation, were found to be nonstationary and there was no evide...

Unlike frequent price promotions, a publicly announced permanent price cut is more likely to cause consumers to strategically shift their decision rules to adapt to the new pricing regime. Research is needed to (1) study whether permanent price cuts cause consumer preference to shift over time; (2) examine how the price cuts affect consumer choices in the short and long run; (3) examine the dif...

price fairness and price satisfaction is one the most important fields in pricing and also in customer satisfaction. in this research, first the dimensions of price fairness, price satisfaction, customer satisfaction, and customer loyalty are extracted from marketing literature, then five hypotheses are developed. in proposed model, price fairness has direct impact on price satisfaction, custom...

We examine the role of high-frequency traders (HFT) in price discovery. Overall HFT play a positive role in price efficiency by trading in the direction of permanent price changes and in the opposite direction of transitory pricing errors on average days and the highest volatility days. This is done through their marketable orders. In contrast, HFT passive non-marketable orders are adversely se...

We analyze the problem of an investor who needs to unwind a portfolio in the face of recurring and uncertain liquidity needs, with a model that accounts for both permanent and temporary price impact of trading. We first show that a risk-neutral investor who myopically deleverages his position to meet an immediate need for cash always prefers to sell more liquid assets. If the investor faces the...