Drift dependence of optimal trade execution strategies under transient price impact

We give a complete solution to the problem of minimizing the expected liquidity costs in the presence of a general drift when the underlying market impact model has linear transient price impact with exponential resilience. It turns out that this problem is well-posed only if the drift is absolutely continuous. Optimal strategies often do not exist, and when they do, they depend strongly on the derivative of the drift. Our approach uses elements from singular stochastic control, even though the problem is essentially non-Markovian due to the transience of price impact and the lack in Markovian structure of the underlying price process. As a corollary, we give a complete solution to the minimization of a certain cost-risk criterion in our setting.     

Climate Policy Under Uncertain and Heterogeneous Climate Damages

We highlight that uncertainty about climate damages and the fact that damages will be distributed heterogeneously across the global population can jointly be an argument for substantially stricter climate policy even if uncertainty and heterogeneity in isolation are not. The reason is that a given climate risk borne by fewer people implies greater welfare losses. However, these losses turn out to be significant only if society is both risk and inequality averse and if climate damages are highly heterogeneous. We discuss how insurance and self-insurance of climate risk could theoretically mitigate this joint effect of uncertainty and heterogeneity and thus admit weaker climate policy. Insurance provides more efficient risk sharing and self-insurance allows strongly impacted individuals to compensate damages by increasing savings. We first use a simple analytical model to introduce the different concepts and then provide more realistic results from the integrated assessment model DICE.