6533b82efe1ef96bd12927d8

RESEARCH PRODUCT

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

Fabrizio Lillo

subject

Physics - Physics and SocietyQuantitative Finance - Trading and Market MicrostructureFinancial assetFOS: Physical sciencesFunction (mathematics)MaximizationPhysics and Society (physics.soc-ph)Condensed Matter PhysicsInvestment (macroeconomics)Power lawElectronic Optical and Magnetic MaterialsTrading and Market Microstructure (q-fin.TR)FOS: Economics and businesssymbols.namesakeProximate and ultimate causationUtility maximization problemsymbolsEconometricsEconomicsPareto distributioneconophysics financial markets business and management

description

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 .

yearjournalcountryeditionlanguage
2006-12-01
10.1140/epjb/e2007-00067-9http://arxiv.org/abs/physics/0612016