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

By Fabrizio Lillo

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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