RT Journal Article
SR Electronic
T1 Optimal Execution for Portfolio Transitions
JF The Journal of Portfolio Management
FD Institutional Investor Journals
SP 33
OP 39
DO 10.3905/jpm.2007.684750
VO 33
IS 3
A1 Mark Kritzman
A1 Simon Myrgren
A1 Sébastien Page
YR 2007
UL https://pm-research.com/content/33/3/33.abstract
AB Institutional investors periodically reallocate portfolios to shift the asset mix or change investment managers. These transitions are subject to a variety of costs, including commissions, opportunity cost, and market impact. Opportunity cost refers to adverse changes in price arising from exogenous market forces; market impact refers to adverse price movements that occur in response to the purchase and sale of securities. Opportunity cost and market impact costs represent the greatest share of transition costs, and investors influence these costs by how they trade. An algorithm may be used to determine the optimal sequence and size of trades that minimize opportunity cost for portfolio transitions, provided that the trades are self-financing. Trades may be partitioned into smaller units to minimize market impact. This algorithm compares favorably to the industry norm, which is to minimize sector differences as a transition unfolds.TOPICS: Portfolio management/multi-asset allocation, portfolio construction, statistical methods