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Optimal Limit Order Choice

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Author Info

  • John K. Wald

    (Rutgers University and The Pennsylvania State University)

  • H. T. Horrigan
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    Abstract

    We describe a method for optimally choosing whether to place a market or limit order (and at what price) using a risk-averse investor's expected utility maximization. We allow for a continuum of investor information, risk aversion, and security characteristics. We show that the choice of optimal market or limit order can be analyzed in a mean-variance framework and combined with the entire portfolio-rebalancing problem. Using NYSE trade order and quote (TORQ) data, we estimate the parameters in our theoretical model and demostrate how they could be used to find optimal limit order discounts under a variety of scenarios.

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    File URL: http://www.journals.uchicago.edu/cgi-bin/resolve?JB780208
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    Bibliographic Info

    Article provided by University of Chicago Press in its journal Journal of Business.

    Volume (Year): 78 (2005)
    Issue (Month): 2 (March)
    Pages: 597-620

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    Handle: RePEc:ucp:jnlbus:v:78:y:2005:i:2:p:597-620

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    Web page: http://www.journals.uchicago.edu/JB/

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    Cited by:
    1. Valenzuela, Marcela & Zer, Ilknur, 2013. "Competition, signaling and non-walking through the book: Effects on order choice," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5421-5435.
    2. Bayar, Onur, 2013. "Liquidity provision in a limit order book without adverse selection," Journal of Economics and Business, Elsevier, vol. 66(C), pages 98-124.
    3. Fong, Kingsley Y.L. & Liu, Wai-Man, 2010. "Limit order revisions," Journal of Banking & Finance, Elsevier, vol. 34(8), pages 1873-1885, August.
    4. Duong, Huu Nhan & Kalev, Petko S., 2013. "Anonymity and order submissions," Pacific-Basin Finance Journal, Elsevier, vol. 25(C), pages 101-118.
    5. Ellul, Andrew & Holden, Craig W. & Jain, Pankaj & Jennings, Robert, 2007. "Order dynamics: Recent evidence from the NYSE," Journal of Empirical Finance, Elsevier, vol. 14(5), pages 636-661, December.
    6. Duong, Huu Nhan & Kalev, Petko S. & Krishnamurti, Chandrasekhar, 2009. "Order aggressiveness of institutional and individual investors," Pacific-Basin Finance Journal, Elsevier, vol. 17(5), pages 533-546, November.

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