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Optimal Liquidity Trading

  • Gur Huberman
  • Werner Stanzl

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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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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  1. Degryse, H.A. & de Jong, F.C.J.M. & van Ravenswaaij, M. & Wuyts, G., 2002. "Aggressive Orders and the Resiliency of a Limit Order Market," Discussion Paper 2002-80, Tilburg University, Center for Economic Research.
  2. 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.
  3. 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.
  4. Foucault, Thierry & Kadan, Ohad & Kandel, Eugene, 2001. "Limit Order Book as a Market for Liquidity," CEPR Discussion Papers 2889, C.E.P.R. Discussion Papers.
  5. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
  6. Kerry Back & Hal Pedersen, 1995. "Long-Lived Information and Intraday Patterns," Finance 9507008, EconWPA.
  7. Back, Kerry, 1992. "Insider Trading in Continuous Time," Review of Financial Studies, Society for Financial Studies, vol. 5(3), pages 387-409.
  8. Bertsimas, Dimitris & Lo, Andrew W., 1998. "Optimal control of execution costs," Journal of Financial Markets, Elsevier, vol. 1(1), pages 1-50, April.
  9. repec:att:wimass:9427 is not listed on IDEAS
  10. Dutta, P.K. & Madhavan, A., 1992. "Price Continuity Rules and Insider Trading," RCER Working Papers 338, University of Rochester - Center for Economic Research (RCER).
  11. Kempf, Alexander & Korn, Olaf, 1999. "Market depth and order size1," Journal of Financial Markets, Elsevier, vol. 2(1), pages 29-48, February.
  12. 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.
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