High-frequency modeling for VWAP based trading strategies a….Image.Marked.pdf

High-frequency modeling for VWAP based trading strategies: a Generalized Autoregressive Score approach Francesco Calvori, Fabrizio Cipollini , Giampiero M. Gallo Abstract Market activity is proxied in the literature in a variety of ways (volatil- ity, volumes, number of trades, etc.) as a way to address the latent variable nature of the information flow. In this framework, the Volume Weighted Average Price (VWAP) is a benchmark measure based on volumes and prices at intra-daily inter- vals frequently used to evaluate a trader’s performance. Under suitable assumptions, splitting a daily order according to ex ante volume predictions is a good strategy to replicate the VWAP. We propose a novel Generalized Autoregressive Score (GAS) based model for predicting volume shares (by intra-daily interval relative to the daily total), inspired by the empirical regularities (intra-daily periodicity patterns, residual serial dependence) of the observed series. Such an approach bypasses the need for modeling volumes directly which may be affected by local trends. An application to 6 stock tickers from the NYSE illustrates the effectiveness of the proposed model. 1 Introduction Managing transaction costs of asset trading represents a central concern in imple- menting investment decisions, especially for institutional investors. Such costs in- clude all expenses related to buying or selling a security and consist of several com- ponents with different degrees of transparency and manageability (cf. Kissel and Glantz (2003, ch. 1) for a comprehensive discussion). One of the most detrimen- Francesco Calvori ` DiSIA – Universita di Firenze, e-mail: calvori@disia.unifi.it Fabrizio Cipollini ` DiSIA – Universita di Firenze, e-mail: cipollini@disia.unifi.it Giampiero M. Gallo ` DiSIA – Universita di Firenze, e-mail: gallog@disia.unifi.it The authors thank the MIUR PRIN MISURA Project, 201