Optimal Closing Benchmarks

14 Pages Posted: 9 Oct 2019 Last revised: 7 Jul 2020

See all articles by Christoph Frei

Christoph Frei

University of Alberta - Department of Mathematical and Statistical Sciences

Joshua Mitra

University of Alberta - Department of Mathematical and Statistical Sciences

Date Written: June 30, 2020

Abstract

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

Frei, Christoph and Mitra, Joshua, Optimal Closing Benchmarks (June 30, 2020). Finance Research Letters, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3461062 or http://dx.doi.org/10.2139/ssrn.3461062

Christoph Frei (Contact Author)

University of Alberta - Department of Mathematical and Statistical Sciences ( email )

Edmonton, Alberta T6G 2G1
Canada
+1 780 492 3613 (Phone)

HOME PAGE: http://www.math.ualberta.ca/~cfrei/

Joshua Mitra

University of Alberta - Department of Mathematical and Statistical Sciences ( email )

Edmonton, Alberta T6G 2G1
Canada

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