NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Optimal Trading Strategy and Supply/Demand Dynamics

Anna Obizhaeva, Jiang Wang

NBER Working Paper No. 11444
Issued in June 2005
NBER Program(s):   AP

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.

download in pdf format
   (388 K)

email paper

This paper is available as PDF (388 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w11444

Users who downloaded this paper also downloaded these:
Biais and Weill w15009 Liquidity Shocks and Order Book Dynamics
Engle and Ferstenberg w12165 Execution Risk
Lo, MacKinlay, and Zhang w6257 Econometric Models of Limit-Order Executions
Jagannathan and Ma w8922 Risk Reduction in Large Portfolios: Why Imposing the Wrong Constraints Helps
Garleanu and Pedersen w15205 Dynamic Trading with Predictable Returns and Transaction Costs
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us