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

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 .

7 pages, 2 figures

References in corpus (4)

• The statistical properties of the volatility of price fluctuations
• More statistical properties of order books and price impact
• Analyzing and modelling 1+1d markets
• Volatility in Financial Markets: Stochastic Models and Empirical Results

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