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Optimal trading in a limit order book using linear strategies

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  • Paolo Pellizzari

    ()
    (Department of Economics, University Of Venice Cà Foscari)

Abstract

We numerically determine the equilibrium trading strategies in a Continuous Double Auction (CDA). We consider heterogeneous and liquidity motivated agents, with private values and costs, that trade sequentially in random order under time constraints and are not aware of the type of the other agents in their session. We assume that they submit limit orders using a simple linear function of the current best quotes (ask and bid). In equilibrium, found using an Evolution Strategies algorithm, impatient agents do not always submit market orders, as in other models of CDAs, and agents take into account both sides of the book in their optimal decision. Finally, we provide a description of the price and of the ``small'' set of states of the equilibrium book.

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Bibliographic Info

Paper provided by Department of Economics, University of Venice "Ca' Foscari" in its series Working Papers with number 2011_16.

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Length: 22
Date of creation: 2011
Date of revision: Sep 2011
Handle: RePEc:ven:wpaper:2011_16

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Keywords: Continuous double auction; dynamic equilibrium; optimal trad- ing strategies; evolution strategies.;

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References

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  1. Pakes, Ariel & McGuire, Paul, 2001. "Stochastic Algorithms, Symmetric Markov Perfect Equilibrium, and the 'Curse' of Dimensionality," Econometrica, Econometric Society, Econometric Society, vol. 69(5), pages 1261-81, September.
  2. Ronald L. Goettler & Christine A. Parlour & Uday Rajan, 2005. "Equilibrium in a Dynamic Limit Order Market," Journal of Finance, American Finance Association, American Finance Association, vol. 60(5), pages 2149-2192, October.
  3. Goettler, Ronald L. & Parlour, Christine A. & Rajan, Uday, 2009. "Informed traders and limit order markets," Journal of Financial Economics, Elsevier, Elsevier, vol. 93(1), pages 67-87, July.
  4. Thierry Foucault & Ohad Kadan & Eugene Kandel, 2005. "Limit Order Book as a Market for Liquidity," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 18(4), pages 1171-1217.
  5. Shira Fano & Marco LiCalzi & Paolo Pellizzari, 2013. "Convergence of outcomes and evolution of strategic behavior in double auctions," Journal of Evolutionary Economics, Springer, Springer, vol. 23(3), pages 513-538, July.
  6. Ioanid Rosu, 2009. "A Dynamic Model of the Limit Order Book," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 22(11), pages 4601-4641, November.
  7. Foucault, Thierry, 1999. "Order flow composition and trading costs in a dynamic limit order market1," Journal of Financial Markets, Elsevier, Elsevier, vol. 2(2), pages 99-134, May.
  8. Biais, Bruno & Hillion, Pierre & Spatt, Chester, 1995. " An Empirical Analysis of the Limit Order Book and the Order Flow in the Paris Bourse," Journal of Finance, American Finance Association, American Finance Association, vol. 50(5), pages 1655-89, December.
  9. Parlour, Christine A, 1998. "Price Dynamics in Limit Order Markets," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 11(4), pages 789-816.
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Cited by:
  1. Paolo Pellizzari & Dan Ladley, 2014. "The simplicity of optimal trading in order book markets," Working Papers, Department of Economics, University of Venice "Ca' Foscari" 2014:05, Department of Economics, University of Venice "Ca' Foscari".

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