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Research Details

Block Trade Contracting, Journal of Financial Economics

Abstract

We study the optimal execution problem in a principal-agent setting. A client contracts to purchase from a dealer. The dealer hedges, buying from the market, creating temporary and permanent price impact. The client chooses a contract, which specifies payment as a function of market prices; hidden action precludes conditioning on the dealer’s hedging trades. We show the first-best benchmark is theoretically achievable with an unrestricted contract set. We then consider weighted-average-price contracts, which are commonly used. In the continuous-time limit, the optimal weighting entails a constant density at interior times and discrete masses at the extremes.

Type

Article

Author(s)

Markus Baldauf, Christoph Frei, Joshua Mollner

Date Published

2024

Citations

Baldauf, Markus, Christoph Frei, and Joshua Mollner. 2024. Block Trade Contracting. Journal of Financial Economics.

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