Optimal Closing Benchmarks
14 Pages Posted: 9 Oct 2019 Last revised: 26 Apr 2021
Date Written: June 30, 2020
In financial markets, the closing price serves as an important benchmark. We introduce a market model to analyze the stability of the closing price with presence of three types of volume: distorting volume, volume that targets the closing price, and volume that is unrelated to the closing price. The optimal closing price is either the price from an auction or the volume weighted average price (VWAP) from regular trading only, explaining the prevalence of these closing benchmarks on financial markets. A succinct condition depending on the different volume types indicates when the inclusion of a closing auction is optimal.
Keywords: benchmark stability, closing auction, volume weighted average price, VWAP
JEL Classification: G14, G18, D44, D82
Suggested Citation: Suggested Citation