Limit order placement as an utility maximization problem and the origin of power law distribution of limit order prices
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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 .
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Cites work
- scientific article; zbMATH DE number 1026574 (Why is no real title available?)
- High-frequency trading in a limit order book
- Institutional Investors and Stock Market Volatility
- Limit order market analysis and modelling: on a universal cause for over-diffusive prices
- More statistical properties of order books and price impact
- Volatility in financial markets: Stochastic models and empirical results
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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