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Optimal Liquidity Trading

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Author Info

  • Gur Huberman
  • Werner Stanzl

Abstract

We study optimal liquidity trading in a framework where trade size has a price impact. A liquidity trader wishes to trade a fixed number of shares within a certain time horizon and to minimize the mean and variance of the costs of trading. Explicit formulas for the optimal trading strategies show that risk-averse liquidity traders reduce their order sizes over time and execute a higher fraction of their total trading volume in early periods when price volatility increases or price sensitivity de

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File URL: http://icfpub.som.yale.edu/publications/2486
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Bibliographic Info

Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm165.

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Date of creation: 01 Dec 2000
Date of revision: 01 Aug 2001
Handle: RePEc:ysm:somwrk:ysm165

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Web page: http://icf.som.yale.edu/
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References

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  1. Easley, David & O'Hara, Maureen, 1992. " Time and the Process of Security Price Adjustment," Journal of Finance, American Finance Association, vol. 47(2), pages 576-605, June.
  2. Back, Kerry, 1992. "Insider Trading in Continuous Time," Review of Financial Studies, Society for Financial Studies, vol. 5(3), pages 387-409.
  3. Dutta, Prajit K. & Madhavan, Ananth, 1995. "Price Continuity Rules and Insider Trading," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 30(02), pages 199-221, June.
  4. FOUCAULT, Thierry & KADAN, Ohad & KANDEL, Eugene, 2001. "Limit order book as a market for liquidity," Les Cahiers de Recherche 728, HEC Paris.
  5. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
  6. Degryse, H.A. & Jong, F.C.J.M. de & Ravenswaaij, M. van & Wuyts, G., 2002. "Aggressive Orders and the Resiliency of a Limit Order Market," Discussion Paper 2002-80, Tilburg University, Center for Economic Research.
  7. Bertsimas, Dimitris & Lo, Andrew W., 1998. "Optimal control of execution costs," Journal of Financial Markets, Elsevier, vol. 1(1), pages 1-50, April.
  8. Hausman, J.A. & Lo, A.W. & MacKinlay, A.C., 1991. "An Ordered Probit Analysis of Transaction Stock Prices," Weiss Center Working Papers 26-91, Wharton School - Weiss Center for International Financial Research.
  9. Back, Kerry & Pedersen, Hal, 1998. "Long-lived information and intraday patterns," Journal of Financial Markets, Elsevier, vol. 1(3-4), pages 385-402, September.
  10. Keim, Donald B & Madhaven, Ananth, 1996. "The Upstairs Market for Large-Block Transactions: Analysis and Measurement of Price Effects," Review of Financial Studies, Society for Financial Studies, vol. 9(1), pages 1-36.
  11. Kempf, Alexander & Korn, Olaf, 1999. "Market depth and order size1," Journal of Financial Markets, Elsevier, vol. 2(1), pages 29-48, February.
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Citations

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Cited by:
  1. Dimitri Vayanos & Jiang Wang, 2012. "Market Liquidity — Theory and Empirical Evidence," NBER Working Papers 18251, National Bureau of Economic Research, Inc.
  2. Takashi Kato, 2011. "An Optimal Execution Problem in Geometric Ornstein-Uhlenbeck Price Process," Papers 1107.1787, arXiv.org, revised May 2012.
  3. Obizhaeva, Anna A. & Wang, Jiang, 2013. "Optimal trading strategy and supply/demand dynamics," Journal of Financial Markets, Elsevier, vol. 16(1), pages 1-32.
  4. Thomas Conlon & John Cotter & Ramazan Gencay, 2012. "Commodity futures hedging, risk aversion and the hedging horizon," Working Papers 201218, Geary Institute, University College Dublin.
  5. Olivier Gu\'eant & Charles-Albert Lehalle, 2012. "General Intensity Shapes in Optimal Liquidation," Papers 1204.0148, arXiv.org, revised Jun 2013.
  6. Alexander Weiss, 2008. "Escaping the Brownian stalkers," Papers 0803.3590, arXiv.org.
  7. Oehmke, Martin, 2014. "Liquidating illiquid collateral," Journal of Economic Theory, Elsevier, vol. 149(C), pages 183-210.
  8. David B. Brown & Bruce Ian Carlin & Miguel Sousa Lobo, 2009. "On the Scholes Liquidation Problem," NBER Working Papers 15381, National Bureau of Economic Research, Inc.
  9. Steven L. Heston & Robert A. Korajczyk & Ronnie Sadka, 2010. "Intraday Patterns in the Cross-section of Stock Returns," Journal of Finance, American Finance Association, vol. 65(4), pages 1369-1407, 08.
  10. Alexander Weiss, 2009. "Executing large orders in a microscopic market model," Papers 0904.4131, arXiv.org, revised Jan 2010.
  11. Zhiwu Chen & Werner Stanzl & Masahiro Watanabe, 2002. "Price Impact Costs and the Limit of Arbitrage," Yale School of Management Working Papers ysm251, Yale School of Management, revised 08 Jun 2006.
  12. Isaenko, Sergei, 2010. "Portfolio choice under transitory price impact," Journal of Economic Dynamics and Control, Elsevier, vol. 34(11), pages 2375-2389, November.
  13. Samuel N. Cohen & Lukasz Szpruch, 2011. "A limit order book model for latency arbitrage," Papers 1110.4811, arXiv.org.
  14. Ryosuke Ishii, 2009. "Optimal Execution in an Evolutionary Setting," KIER Working Papers 670, Kyoto University, Institute of Economic Research.
  15. Dick-Nielsen, Jens & Feldhütter, Peter & Lando, David, 2012. "Corporate bond liquidity before and after the onset of the subprime crisis," Journal of Financial Economics, Elsevier, vol. 103(3), pages 471-492.
  16. Kervel, V.L. van, 2013. "Competition between stock exchanges and optimal trading," Open Access publications from Tilburg University urn:nbn:nl:ui:12-5663709, Tilburg University.
  17. Olivier Gu\'eant & Charles-Albert Lehalle & Joaquin Fernandez Tapia, 2011. "Optimal Portfolio Liquidation with Limit Orders," Papers 1106.3279, arXiv.org, revised Jul 2012.
  18. Frey, Stefan & Sandås, Patrik, 2009. "The impact of iceberg orders in limit order books," CFR Working Papers 09-06, University of Cologne, Centre for Financial Research (CFR).

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