Optimal Liquidity Trading* | Zendy

Gur Huberman | Zendy; Werner Stanzl | Zendy

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Optimal Liquidity Trading*

Author(s) -

Gur Huberman,

Werner Stanzl

Publication year - 2005

Publication title -

european finance review

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 4.933

H-Index - 61

eISSN - 1573-692X

pISSN - 1382-6662

DOI - 10.1007/s10679-005-7591-5

Subject(s) - market liquidity , volatility (finance) , liquidity premium , economics , liquidity risk , monetary economics , transaction cost , volume weighted average price , mean reversion , order (exchange) , dark liquidity , liquidity crisis , financial economics , econometrics , high frequency trading , market maker , microeconomics , finance , paleontology , horse , stock market , biology

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 or liquidity increases. In the presence of transaction fees, traders want to trade less often when either price volatility or liquidity goes up or when the speed of price reversion declines. In the multi-asset case, price effects across assets have a substantial impact on trading behavior. Copyright Springer 2005

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