Optimal trading strategy and supply/demand dynamics
By: Anna Obizhaeva, Jiang Wang.
Contributors: Wang, Jiang.; National Bureau of Economic Research.
Series: NBER working paper series ;; working paper 11444; Working paper series (National Bureau of Economic Research : Online) ;; working paper no. 11444.
Publisher: National Bureau of Economic Research
Published: 2005
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Subjects: Stocks; Supply and demand
Description: "The supply/demand of a security in the market is an intertemporal, not a static, object and its dynamics is crucial in determining market participants' trading behavior.  Previous studies on the optimal trading strategy to execute a given order focuses mostly on the static properties of the supply/demand.  In this paper, we show that the dynamics of the supply/demand is of critical importance to the optimal execution strategy, especially when trading times are endogenously chosen.  Using a limit-order-book market, we develop a simple framework to model the dynamics of supply/demand and its impact on execution cost.  We show that the optimal execution strategy involves both discrete and continuous trades, not only continuous trades as previous work suggested.  The cost savings from the optimal strategy over the simple continuous strategy can be substantial.  We also show that the predictions about the optimal trading behavior can have interesting implications on the observed behavior of intraday volume, volatility and prices"--National Bureau of Economic Research web site.
Notes: Includes bibliographical references.
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Mode of access: World Wide Web.