Optimal Closing-Price Strategy: Peculiarities and Practicalities

18 Pages Posted: 17 Apr 2016

See all articles by Yu Hang (Gabriel) Kan

Yu Hang (Gabriel) Kan

Bloomberg Tradebook; Columbia University - Department of Industrial Engineering and Operations Research (IEOR)

Park Sanghyun

Bloomberg Tradebook

Date Written: February 23, 2016

Abstract

We derive an optimal trading strategy that benchmarks the closing price in a mean-variance optimization framework. By taking into account risk aversion, market impact, volatility and market volume, the optimal strategy specifies the quantities to be traded at each point in time in the continuous trading session as well as in the closing auction. The optimal strategy is expressed in closed form, which allows fast implementation. Because the closing price is a moving target, despite the apparent similarity with arrival-price strategies, closing-price strategies show distinctive features such unwinding of previous fills. Exploration of the efficient frontier along with the late-start VWAP strategies, which traders often use to benchmark closing prices, leads to a practical method to determine the risk aversion parameter from an effective trading rate.

Keywords: optimal trading strategy, closing price, closing auction, efficient frontier, mean-variance optimization, market impact, risk aversion

JEL Classification: C63, E44, G00

Suggested Citation

Kan, Yu Hang and Sanghyun, Park, Optimal Closing-Price Strategy: Peculiarities and Practicalities (February 23, 2016). Available at SSRN: https://ssrn.com/abstract=2765286 or http://dx.doi.org/10.2139/ssrn.2765286

Yu Hang Kan (Contact Author)

Bloomberg Tradebook ( email )

731 Lexington Avenue
New York, NY 10022
United States

Columbia University - Department of Industrial Engineering and Operations Research (IEOR) ( email )

331 S.W. Mudd Building
500 West 120th Street
New York, NY 10027
United States

HOME PAGE: http://www.columbia.edu/~yk2246

Park Sanghyun

Bloomberg Tradebook ( email )

731 Lexington Avenue
New York, NY 10022
United States

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