Optimal Trading in the Presence of Economic Events: Wilmott Magazine Article

The problem of optimal buy/sell strategies in the presence of economic events is addressed. The optimal trading strategy is a result of a compromise between minimizing the expected trading cost and minimizing the risk of trading. An economic indicator publication results in a considerable short-term increase in market volatility above the average level, as well as a decrease in market liquidity. This in turn affects the trading risk and thus the cost-versus-risk optimization. An analytic solution for the corresponding calculus-of-variations problem is found and corresponding trading algorithms are analyzed. An economic indicator hump volatility model is proposed and justified against publicly available historical market data.

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