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arXiv · 1803.08336

Equilibrium Effects of Intraday Order-Splitting Benchmarks

Jin Hyuk Choi·Kasper Larsen·Duane J. Seppi
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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.

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Jin Hyuk Choi, Kasper Larsen, Duane J. Seppi. 2018-03-22. Equilibrium Effects of Intraday Order-Splitting Benchmarks. https://arxiv.org/abs/1803.08336

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