Optimal Limit Order Choice
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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