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Optimal Liquidity Trading

Author

Listed:
  • Gur Huberman
  • Werner Stanzl

Abstract

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.

Suggested Citation

  • Gur Huberman & Werner Stanzl, 2005. "Optimal Liquidity Trading," Review of Finance, European Finance Association, vol. 9(2), pages 165-200.
    • Handle: RePEc:oup:revfin:v:9:y:2005:i:2:p:165-200.
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    File URL: http://hdl.handle.net/10.1007/s10679-005-7591-5
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    References listed on IDEAS

    as
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