Improving VWAP strategies: A dynamic volume approach

Białkowski, Jędrzej; Darolles, Serge; Fol, Gaëlle Le

doi:10.1016/j.jbankfin.2007.09.023

Cited by 79 publications

(90 citation statements)

References 21 publications

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“…Moving average automatic trading strategies set buying and selling orders depending on the position of the average price for a given period with respect to the current market price (see [50]). Finally, weighted arithmetic average indexes are used as trading benchmarks in pension plans (see [11]). …”

Section: Permanent Repository Linkmentioning

confidence: 99%

General Optimized Lower and Upper Bounds for Discrete and Continuous Arithmetic Asian Options

Fusai

Kyriakou

2016

Mathematics of OR

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This is the accepted version of the paper.This version of the publication may differ from the final published version. We propose an accurate method for pricing arithmetic Asian options on the discrete or continuous average in a general model setting by means of a lower bound approximation. In particular, we derive analytical expressions for the lower bound in the Fourier domain. This is then recovered by a single univariate inversion and sharpened using an optimization technique. In addition, we derive an upper bound to the error from the lower bound price approximation. Our proposed method can be applied to computing the prices and price sensitivities of Asian options with fixed or floating strike price, discrete or continuous averaging, under a wide range of stochastic dynamic models, including exponential Lévy models, stochastic volatility models, and the constant elasticity of variance diffusion. Our extensive numerical experiments highlight the notable performance and robustness of our optimized lower bound for different test cases. Permanent repository linkKey words : arithmetic Asian options; CEV diffusion; stochastic volatility models; Lévy processes; discrete average; continuous average MSC2000 subject classification : Primary: 91B70, 91B25, 60J25; Secondary: 60H30, 91B24 OR/MS subject classification : Primary: asset pricing, diffusion, Markov processes, stochastic model applications 1. Introduction. We develop accurate analytical pricing formulae for discretely and continuously monitored arithmetic Asian options under general stochastic asset models, including exponential Lévy models, stochastic volatility models, and the constant elasticity of variance diffusion. The payoff of the arithmetic Asian option depends on the arithmetic average price of the underlying asset monitored over a pre-specified period. For more than two decades, much effort has been put into the research on efficient methodologies for computing the price of this option or, in general, expected values of functionals of the average value, under different model assumptions for the underlying. Developing such methods is of considerable practical importance as arithmetic averages see wide application in many fields of finance. Amongst others, we mention uses in computing net present value in project valuation (see [72]), optimal capacity planning under average demand uncertainty for a single firm (see [32]) and stock-swap merger proposals (see [60]). Weighted arithmetic averages also appear in technical analysis and in algorithmic trading; for example, we recall the moving average trading rule and its use from an asset allocation perspective (see [75]). Moving average automatic trading strategies set buying and selling orders depending on the position of the average price for a given period with respect to the current market price (see [50]). Finally, weighted arithmetic average indexes are used as trading benchmarks in pension plans (see [11]).Arithmetic Asian options are very popular among derivatives traders and risk managers. Their...

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Section: Permanent Repository Linkmentioning

confidence: 99%

General Optimized Lower and Upper Bounds for Discrete and Continuous Arithmetic Asian Options

Fusai

Kyriakou

2016

Mathematics of OR

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“…In fact, these companies are sometimes modifying their holding in some groups in order to clear their position before the end of the year. These large transfers are usually done using applications 4 at the end of the year. These trades, which do not correspond to any underlying market activity, are part of the traded volume.…”

Section: Volume Decompositionmentioning

confidence: 99%

“…Decompositions of volume into common and specific components also appear to be a growing interest of the literature (see e.g. [17], unpublished [24], [7], [4], and [26]). In contrast to previous approaches, our decomposition directly comes from investment practices and is directly linked to liquidity.…”

Section: Introductionmentioning

confidence: 99%

Trading Volume and Arbitrage

Darolles¹,

Fol²

2014

4th Annual International Conference on Accounting and Finance (AF 2014)

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Abstract-Decomposing returns into market and stock specific components is common practice and forms the basis of popular asset pricing models. What about volume? Can volume be decomposed in the same way as returns? Lo and Wang (2000) suggest such a decomposition. Our paper contributes to this literature in two different ways. First, we provide a model to explain why volumes deviate from the benchmark. Our interpretation is in terms of arbitrage strategies and liquidity. Second, we propose a new efficient screening tool that allows practitioners to extract specific information from volume time series. We provide an empirical illustration of the relevance and the possible uses of our approach on daily data from the FTSE index from 2000 to 2002.

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“…End-of-day VWAP for individual stocks is reported by exchanges, and guaranteed VWAP orders are available through most brokerage houses. For example, Interactive Brokers offer a guarranteed VWAP order for a cost of 10 basis points, while Bia lkowski, Darolles, and Le Fol (2008) report that in Europe the cost of VWAP orders ranges between 10 and 20 basis points. Beyond its popularity with institutional investors, VWAP has been used by regulators for assessing taxes in cases of issuance of shares to existing shareholders.…”

Section: Introductionmentioning

confidence: 99%

Quintet Volume Projection

Марков¹,

Vilenskaia²,

Rashkovich³

2017

JOT

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We consider the problem of finding a strategy that tracks the volume weighted average price (VWAP) of a stock, a key measure of execution quality for large orders used by institutional investors. We obtain the optimal, dynamic, VWAP tracking strategy in closed form in a model without trading costs with general price and volume dynamics. We build a model of intraday volume using the Trade and Quote dataset to empirically test the strategy, both without trading costs and when trading has temporary and permanent effects, and find that the implementation cost is lower than the cost charged by brokerage houses.JEL classification: G12, G29, C61

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Improving VWAP strategies: A dynamic volume approach

Cited by 79 publications

References 21 publications

General Optimized Lower and Upper Bounds for Discrete and Continuous Arithmetic Asian Options

General Optimized Lower and Upper Bounds for Discrete and Continuous Arithmetic Asian Options

Trading Volume and Arbitrage

Quintet Volume Projection

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