Optimal closing benchmarks

Christoph Frei and Joshua Mitra

Finance Research Letters, 2021, vol. 40, issue C

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 (search for similar items in EconPapers)
JEL-codes: D44 D82 G14 G18 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:40:y:2021:i:c:s1544612320301537

DOI: 10.1016/j.frl.2020.101674

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