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

2006/12/01 by Fabrizio Lillo · 3 citations
Economics, Econometrics and Finance · Physics and Astronomy · #Complex Systems and Time Series Analysis #Financial Markets and Investment Strategies #Market Dynamics and Volatility #physics.soc-ph #q-fin.TR

paper · pdf · doi:10.1140/epjb/e2007-00067-9

7 pages, 2 figures

arxiv created 2006/12/01 · openalex publication_date 2007/02/01 · arxiv updated 2009/12/01 · openalex created_date 2016/06/24 · openalex updated_date 2026/07/29

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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