| As science and technology gets promoted and computer has changed people’s life, the Program Trading gets prevalent in capital market, of which the most popular and mature one is the VWAP strategy. The core idea of VWAP strategy is to divide a large-amount order into several small-amount orders, with the purpose of minimizing the market impact of a large order. In order to execute a successful VWAP strategy, the priority of all lies on the accurate forecast of the intraday trading volume distribution, and an outstanding strategy will produce a close or even better result compared to the market price. This paper will present a dynamic model, using iterative method, to predict the trading volume distribution.The traditional forecasting method is to divide a trading day into several intervals, and use the historical data, calculating the arithmetic or weighted mean of volume in each interval. The traditional strategies do not contain the new information appearing in the trading day, that is why they are called static strategies.The main works done in this paper includes:Review of the history and development of algorithmic trading:Chapter 1, introduction and Chapter 2, Literature Review present the origin, development and current situation of algorithmic trading, in China and abroad. Also the practical value to study algorithmic trading is stated. The Literature Review gives a retrospect of important articles about trading volume and algorithmic trading.Model:Based on static strategies, this paper presents a dynamic mdoel using iterative method, and introduce market information into the process. The kernel factor of this model is the range of market information and the adjustment factor corresponding to information.Empirical test:There will be three parts in the empirical test. The first part just contains one corporation in Chinese A-share market, which is Shanghai Airport. The main purpose of this part lies on the effectiveness of market information. There are two kinds of information defined in the paper, and each one is tested for its forecasting accuracy. Also the improvement of VWAP for the whole trading day is calculted. The result exhibit a better VWAP comparing to the tradional strategy. The second part usign ten corporations in Chinese SSE A-share market, take a sensitivity analysis to information range and adjustment factor. The final outcome indicates that these objects present a high sensitivity to adjustment factor and relatively low sensitivity to information range. The main purpose of the third part of the empirical test is to verify the robustness of the dynamic strategy. In this part, all the SSE A-share corporation were divided into four groups (the maximum, second-maximum, second-minimum, minimum) by their free circulation market value. The empirical tests are done repeatedly in the samples extracted randomly from the four groups. This part gets 80 observations,20 in each group. And the results show that, in three of the four groups, the dynamic strategies beat the traditional one. However, in the group second-maximum, there is 80% probability for the dynamic strategy to beat the traditional one, but the mean value and t value do not provide sufficient support.Summary and further study:Most of the results in this paper are supportive for the dynamic model, but there are still some problems to be solved in future study. |
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