Optimal Liquidity Trading

59 Pages Posted: 11 Dec 2000

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

Date Written: October 7, 2000

Abstract

We study optimal liquidity trading in a framework where trade size has a price impact. 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 increases or price sensitivity decreases. In the presence of transaction fees, numerical simulations suggest that traders want to trade more frequently when price volatility or price sensitivity goes up. In the multi-asset case, price effects across assets have a substantial impact on trading behavior, as does continuous-time trading.

JEL Classification: C61, D40, G12

Suggested Citation

Huberman, Gur and Stanzl, Werner, Optimal Liquidity Trading (October 7, 2000). EFA 2001 Barcelona Meetings; Yale ICF Working Paper No. 00-21; Yale SOM Working Paper No. ICF - 00-21. Available at SSRN: https://ssrn.com/abstract=249973 or http://dx.doi.org/10.2139/ssrn.249973

Gur Huberman

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States
(212) 854-5553 (Phone)

Werner Stanzl (Contact Author)

Yale University - International Center for Finance ( email )

Box 208200
New Haven, CT 06520-8200
United States
203-436-0666 (Phone)
203-436-0630 (Fax)

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

Register to save articles to
your library

Register

Paper statistics

Downloads
1,581
Abstract Views
8,462
rank
10,708
PlumX Metrics