Limit order placement as an utility maximization problem and the origin of power law distribution of limit order prices

DOI10.1140/EPJB/E2007-00067-9zbMATH Open1189.91124arXivphysics/0612016OpenAlexW2033851058MaRDI QIDQ978838FDOQ978838

Authors: J. Martínez 

Publication date: 25 June 2010

Published in: The European Physical Journal B. Condensed Matter and Complex Systems (Search for Journal in Brave)

Abstract: I consider the problem of the optimal limit order price of a financial asset in the framework of the maximization of the utility function of the investor. The analytical solution of the problem gives insight on the origin of the recently empirically observed power law distribution of limit order prices. In the framework of the model, the most likely proximate cause of this power law is a power law heterogeneity of traders' investment time horizons .

Full work available at URL: https://arxiv.org/abs/physics/0612016

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Mathematics Subject Classification ID

Applications of statistical and quantum mechanics to economics (econophysics) (91B80) Financial applications of other theories (91G80)

Cites Work

• Title not available (Why is that?)
• More statistical properties of order books and price impact
• High-frequency trading in a limit order book
• Institutional Investors and Stock Market Volatility
• Volatility in financial markets: Stochastic models and empirical results
• Limit order market analysis and modelling: on a universal cause for over-diffusive prices

Cited In (6)

• Price dynamics in an order-driven market with Bayesian learning
• Order scoring, bandit learning and order cancellations
• Structure-preserving desynchronization of minority games
• Limit order books
• Diffusive behavior and the modeling of characteristic times in limit order executions
• The power of patience: a behavioural regularity in limit-order placement

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