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Equilibrium Effects of Intraday Order-Splitting Benchmarks

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  • Jin Hyuk Choi
  • Kasper Larsen
  • Duane J. Seppi

Abstract

This paper presents a continuous-time model of intraday trading, pricing, and liquidity with dynamic TWAP and VWAP benchmarks. The model is solved in closed-form for the competitive equilibrium and also for non-price-taking equilibria. The intraday trajectories of TWAP trading targets cause predictable intraday patterns of price pressure, and randomness in VWAP target trajectories induces additional randomness in intraday price-pressure patterns. TWAP and VWAP trading both reduce market liquidity and increase price volatility relative to just terminal trading targets alone. The model is computationally tractable, which lets us provide a number of numerical illustrations.

Suggested Citation

  • Jin Hyuk Choi & Kasper Larsen & Duane J. Seppi, 2018. "Equilibrium Effects of Intraday Order-Splitting Benchmarks," Papers 1803.08336, arXiv.org, revised Mar 2020.
    • Handle: RePEc:arx:papers:1803.08336
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    References listed on IDEAS

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    1. Peter O. Christensen & Kasper Larsen, 2014. "Incomplete Continuous-Time Securities Markets with Stochastic Income Volatility," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 4(2), pages 247-285.
    2. Christensen, Peter Ove & Larsen, Kasper & Munk, Claus, 2012. "Equilibrium in securities markets with heterogeneous investors and unspanned income risk," Journal of Economic Theory, Elsevier, vol. 147(3), pages 1035-1063.
    3. Dimitri Vayanos, 1999. "Strategic Trading and Welfare in a Dynamic Market," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(2), pages 219-254.
    4. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
    5. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    6. Bruce Ian Carlin & Miguel Sousa Lobo & S. Viswanathan, 2007. "Episodic Liquidity Crises: Cooperative and Predatory Trading," Journal of Finance, American Finance Association, vol. 62(5), pages 2235-2274, October.
    7. Jin Choi & Kasper Larsen, 2015. "Taylor approximation of incomplete Radner equilibrium models," Finance and Stochastics, Springer, vol. 19(3), pages 653-679, July.
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    Cited by:

    1. Martin Herdegen & Johannes Muhle-Karbe & Dylan Possamaï, 2021. "Equilibrium asset pricing with transaction costs," Finance and Stochastics, Springer, vol. 25(2), pages 231-275, April.
    2. Peter Bank & Ibrahim Ekren & Johannes Muhle-Karbe, 2018. "Liquidity in Competitive Dealer Markets," Papers 1807.08278, arXiv.org, revised Mar 2021.
    3. Johannes Muhle-Karbe & Marcel Nutz & Xiaowei Tan, 2019. "Asset Pricing with Heterogeneous Beliefs and Illiquidity," Papers 1905.05730, arXiv.org, revised Mar 2020.
    4. Lukas Gonon & Johannes Muhle-Karbe & Xiaofei Shi, 2019. "Asset Pricing with General Transaction Costs: Theory and Numerics," Papers 1905.05027, arXiv.org, revised Apr 2020.
    5. Martin Herdegen & Johannes Muhle-Karbe & Dylan Possamai, 2019. "Equilibrium Asset Pricing with Transaction Costs," Papers 1901.10989, arXiv.org, revised Sep 2020.

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