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Optimal trading in a limit order book using linear strategies

Paolo Pellizzari

No 2011_16, Working Papers from Department of Economics, University of Venice "Ca' Foscari"

Abstract: We numerically determine the equilibrium trading strategies in a Continuous Double Auction (CDA). We consider heterogeneous and liquidity motivated agents, with private values and costs, that trade sequentially in random order under time constraints and are not aware of the type of the other agents in their session. We assume that they submit limit orders using a simple linear function of the current best quotes (ask and bid). In equilibrium, found using an Evolution Strategies algorithm, impatient agents do not always submit market orders, as in other models of CDAs, and agents take into account both sides of the book in their optimal decision. Finally, we provide a description of the price and of the ``small'' set of states of the equilibrium book.

Keywords: Continuous double auction; dynamic equilibrium; optimal trad- ing strategies; evolution strategies. (search for similar items in EconPapers)
JEL-codes: C63 C72 D44 D82 (search for similar items in EconPapers)
Pages: 22
Date: 2011, Revised 2011-09
New Economics Papers: this item is included in nep-cta and nep-mst
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Citations: View citations in EconPapers (2)

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