Optimal trading in a limit order book using linear strategies
AbstractWe 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 InfoPaper provided by Department of Economics, University of Venice "Ca' Foscari" in its series Working Papers with number 2011_16.
Date of creation: 2011
Date of revision: Sep 2011
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More information through EDIRC
Continuous double auction; dynamic equilibrium; optimal trad- ing strategies; evolution strategies.;
Find related papers by JEL classification:
- D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-11-14 (All new papers)
- NEP-CTA-2011-11-14 (Contract Theory & Applications)
- NEP-MST-2011-11-14 (Market Microstructure)
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