Optimal Liquidity Trading

Posted: 1 Sep 2008

See all articles by Gur Huberman

Gur Huberman

Columbia Business School - Finance and Economics

Werner Stanzl

Yale University - International Center for Finance

Multiple version iconThere are 2 versions of this paper

Abstract

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 or liquidity increases. In the presence of transaction fees, traders want to trade less often when either price volatility or liquidity goes up or when the speed of price reversion declines. In the multi-asset case, price effects across assets have a substantial impact on trading behavior.

Suggested Citation

Huberman, Gur and Stanzl, Werner, Optimal Liquidity Trading. Review of Finance, Vol. 9, Issue 2, pp. 165-200, 2005. Available at SSRN: https://ssrn.com/abstract=1260593 or http://dx.doi.org/10.1007/s10679-005-7591-5

Gur Huberman (Contact Author)

Columbia Business School - Finance and Economics ( email )

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Werner Stanzl

Yale University - International Center for Finance ( email )

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New Haven, CT 06520-8200
United States
203-436-0666 (Phone)
203-436-0630 (Fax)

HOME PAGE: http://som.yale.edu/~ws69

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