Optimal execution for portfolio transactions

Abstract

In my thesis I explore the problem of optimizing trading strategies for complex portfolio transitions. Institutional investors run into this issue during periodic portfolio rebalancing or transition between asset managers. The costs of rebalancing can be broadly broken into trading costs (both the transaction cost and the market impact) and the opportunity costs of delaying the execution and bearing the risk of current-to-target portfolio divergence. This thesis proposes a methodology for measuring the opportunity cost as well as a strategy that minimizes the proposed measure through optimal portfolio transition execution. The benefits from the proposed trading strategy are benchmarked against the industry standard portfolio trading practices.