IDEAS home Printed from https://ideas.repec.org/a/eee/finlet/v40y2021ics1544612320301537.html
   My bibliography  Save this article

Optimal closing benchmarks

Author

Listed:
  • Frei, Christoph
  • Mitra, Joshua

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.

Suggested Citation

  • Frei, Christoph & Mitra, Joshua, 2021. "Optimal closing benchmarks," Finance Research Letters, Elsevier, vol. 40(C).
    • Handle: RePEc:eee:finlet:v:40:y:2021:i:c:s1544612320301537
    DOI: 10.1016/j.frl.2020.101674
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1544612320301537
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.frl.2020.101674?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Thierry Foucault & Ohad Kadan & Eugene Kandel, 2005. "Limit Order Book as a Market for Liquidity," The Review of Financial Studies, Society for Financial Studies, vol. 18(4), pages 1171-1217.
    2. Duffie, Darrell & Dworczak, Piotr, 2018. "Robust Benchmark Design," Research Papers 3175, Stanford University, Graduate School of Business.
    3. Duffie, Darrell & Dworczak, Piotr, 2021. "Robust benchmark design," Journal of Financial Economics, Elsevier, vol. 142(2), pages 775-802.
    4. Angelo Aspris & Sean Foley & Peter O'Neill, 2020. "Benchmarks in the spotlight: The impact on exchange traded markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(11), pages 1691-1710, November.
    5. Kandel, Eugene & Rindi, Barbara & Bosetti, Luisella, 2012. "The effect of a closing call auction on market quality and trading strategies," Journal of Financial Intermediation, Elsevier, vol. 21(1), pages 23-49.
    6. Hillion, Pierre & Suominen, Matti, 2004. "The manipulation of closing prices," Journal of Financial Markets, Elsevier, vol. 7(4), pages 351-375, October.
    7. Albert S Kyle & Anna A Obizhaeva & Yajun Wang, 2018. "Smooth Trading with Overconfidence and Market Power," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 85(1), pages 611-662.
    8. Olivier Gu'eant & Guillaume Royer, 2013. "VWAP execution and guaranteed VWAP," Papers 1306.2832, arXiv.org, revised May 2014.
    9. Christoph Frei & Nicholas Westray, 2015. "Optimal Execution Of A Vwap Order: A Stochastic Control Approach," Mathematical Finance, Wiley Blackwell, vol. 25(3), pages 612-639, July.
    10. Humphery-Jenner, Mark L., 2011. "Optimal VWAP trading under noisy conditions," Journal of Banking & Finance, Elsevier, vol. 35(9), pages 2319-2329, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Markus Baldauf & Christoph Frei & Joshua Mollner, 2022. "Principal Trading Arrangements: When Are Common Contracts Optimal?," Management Science, INFORMS, vol. 68(4), pages 3112-3128, April.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Markus Baldauf & Christoph Frei & Joshua Mollner, 2022. "Principal Trading Arrangements: When Are Common Contracts Optimal?," Management Science, INFORMS, vol. 68(4), pages 3112-3128, April.
    2. Jiayi Li & Sumei Luo & Guangyou Zhou, 2021. "Call auction, continuous trading and closing price formation," Quantitative Finance, Taylor & Francis Journals, vol. 21(6), pages 1037-1065, June.
    3. Eric Budish & Robin S. Lee & John J. Shim, 2019. "A Theory of Stock Exchange Competition and Innovation: Will the Market Fix the Market?," NBER Working Papers 25855, National Bureau of Economic Research, Inc.
    4. Victor Olkhov, 2021. "Three Remarks On Asset Pricing," Papers 2105.13903, arXiv.org, revised Jan 2024.
    5. Tseng, Yi-Heng & Chen, Shu-Heng, 2015. "Limit order book transparency and order aggressiveness at the closing call: Lessons from the TWSE 2012 new information disclosure mechanism," Pacific-Basin Finance Journal, Elsevier, vol. 35(PA), pages 241-272.
    6. Ya‐Kai Chang & Robin K. Chou & J. Jimmy Yang, 2020. "A rare move: The effects of switching from a closing call auction to a continuous trading," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(3), pages 308-328, March.
    7. Christopher Kath & Florian Ziel, 2020. "Optimal Order Execution in Intraday Markets: Minimizing Costs in Trade Trajectories," Papers 2009.07892, arXiv.org, revised Oct 2020.
    8. Olivier Guéant, 2016. "The Financial Mathematics of Market Liquidity: From Optimal Execution to Market Making," Post-Print hal-01393136, HAL.
    9. Victor Olkhov, 2023. "Market-Based Probability of Stock Returns," Papers 2302.07935, arXiv.org, revised Feb 2024.
    10. Kyong Shik Eom & Kyung Yoon Kwon & Sung Chae La & Jong-Ho Park, 2022. "Dynamic and Static Volatility Interruptions: Evidence from the Korean Stock Markets," JRFM, MDPI, vol. 15(3), pages 1-19, February.
    11. Duffie, Darrell & Dworczak, Piotr, 2021. "Robust benchmark design," Journal of Financial Economics, Elsevier, vol. 142(2), pages 775-802.
    12. Alex Frankel & Navin Kartik, 2019. "Improving Information from Manipulable Data," Papers 1908.10330, arXiv.org, revised Feb 2021.
    13. Chan, Shu Hui & Huang, Yu Chuan & Lin, Sheng-Min, 2020. "Market transparency and closing price behavior on month-end days: Evidence from Taiwan," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).
    14. Marlene Haas & Marius Andrei Zoican, 2016. "Beyond the Frequency Wall: Speed and Liquidity on Batch Auction Markets," Post-Print hal-01484805, HAL.
    15. Ahmed Baig & Drew B. Winters, 2022. "The search for a new reference rate," Review of Quantitative Finance and Accounting, Springer, vol. 58(3), pages 939-976, April.
    16. Zhang, Anthony Lee, 2022. "Competition and manipulation in derivative contract markets," Journal of Financial Economics, Elsevier, vol. 144(2), pages 396-413.
    17. Victor Olkhov, 2022. "Market-Based Asset Price Probability," Papers 2205.07256, arXiv.org, revised Feb 2024.
    18. Gong, Aibo & Ke, Shaowei & Qiu, Yawen & Shen, Rui, 2022. "Robust pricing under strategic trading," Journal of Economic Theory, Elsevier, vol. 199(C).
    19. Muto, Ichiro, 2017. "The role of the reference rate in an interbank market with imperfect information," Global Finance Journal, Elsevier, vol. 34(C), pages 16-31.
    20. Chen, Jiakai, 2021. "LIBOR's poker," Journal of Financial Markets, Elsevier, vol. 55(C).

    More about this item

    Keywords

    Benchmark stability; Closing auction; Volume weighted average price; VWAP;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:finlet:v:40:y:2021:i:c:s1544612320301537. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/frl .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.