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- Choi, Jin Hyuk
- Mathematical Finance Lab.
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Equilibrium Effects of Intraday Order-Splitting Benchmarks
- Author(s)
- Choi, Jin Hyuk, Larsen, Kasper, Seppi, Duane
- Issued Date
- 2021-03
- Citation
- MATHEMATICS AND FINANCIAL ECONOMICS, v.15, pp.315 - 352
- Abstract
- This paper presents a continuous-time model of intraday trading, pricing, and liquidity with dynamic TWAP and VWAP benchmarks. The model is solved in closed-form for the competitive equilibrium and also for non-price-taking equilibria. The intraday trajectories of TWAP trading targets cause predictable intraday patterns of price pressure, and randomness in VWAP target trajectories induces additional randomness in intraday price-pressure patterns. TWAP and VWAP trading both reduce market liquidity and increase price volatility relative to just terminal trading targets alone. The model is computationally tractable, which lets us provide a number of numerical illustrations.
- Publisher
- Springer Verlag
- ISSN
- 1862-9679
- Keyword (Author)
- Dynamic trading, TWAP, VWAP, Portfolio rebalancing, Liquidity, Market-maker inventory, Equilibria, Market microstructure
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