Optimal VWAP Tracking

66 Pages Posted: 1 Oct 2013

See all articles by Daniel Mitchell

Daniel Mitchell

University of Texas at Austin - Red McCombs School of Business

Jedrzej Pawel Bialkowski

University of Canterbury - Department of Economics and Finance

Stathis Tompaidis

University of Texas at Austin - McCombs School of Business

Date Written: September 30, 2013

Abstract

We consider the problem of finding a strategy that tracks the volume weighted average price (VWAP) of a stock, a key measure of execution quality for large orders used by institutional investors. We obtain the optimal, dynamic, VWAP tracking strategy in closed form in a model with general price and volume dynamics and show that it can be extended to incorporate proportional transaction costs. We build a model of intraday volume using the Trade and Quote dataset to empirically test the strategy, both without trading costs and when trading has temporary effects that include the bid-ask spread and depth of the order book, and permanent effects that reflect the potential information content of trades. We find that the implementation cost of the strategy we propose is lower than the cost charged by brokerage houses.

Keywords: Volume Weighted Average Price, Algorithmic Trading, Trading Volume, Trading Costs, Dynamic Programming

JEL Classification: G12, G29, C61

Suggested Citation

Mitchell, Daniel and Bialkowski, Jedrzej Pawel and Tompaidis, Stathis, Optimal VWAP Tracking (September 30, 2013). Available at SSRN: https://ssrn.com/abstract=2333916 or http://dx.doi.org/10.2139/ssrn.2333916

Daniel Mitchell (Contact Author)

University of Texas at Austin - Red McCombs School of Business ( email )

Austin, TX 78712
United States

Jedrzej Pawel Bialkowski

University of Canterbury - Department of Economics and Finance ( email )

Private Bag 4800
Christchurch, 8140
New Zealand

Stathis Tompaidis

University of Texas at Austin - McCombs School of Business ( email )

Austin, TX 78712
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
540
Abstract Views
2,570
rank
64,172
PlumX Metrics