When do you use TWAP over VWAP?

CFA Level III
#1

Can you use TWAP in trending volatile markets? Or do you use implementation shortfall or another method? Thanks.

#2

vwap and twap good for NON trending market, and SMALL volume

#3

but in the same time implementation shortfall is not suitable for volatile market!

#4

but check this article, it states that IP. Shortfall does better in volatile markets (page 10)

http://www.itg.com/news_events/ITG_Volatility_Algo_Trading_Paper.pdf

don’t recall what the curriculum said.

#5

market was NOT volatile. it was Trending

#6

so if markets are not volatile but is trending you use Implementation Shortfall.

#7

TWAP is used in volatile and low liquidity markets.

#8

It is in the CFA text book page 45, TWAP is useful “whose volume patterns might be erratic.”

#9

It is in the CFA text book page 45, TWAP is useful “whose volume patterns might be erratic.”

#10

agree with you on that part, what if it is volatile and trending, then will you still use TWAP

#11

trending you still use imp shortfall - it’s biased towards earlier execution to reduce delay costs and realized g/l

#12

Also, I believe the order was a large, Im not sure if it was a large% of daily volume though. But that makes Imp-Shortfall a good candidate.

I thought imp shortfall works well in volatile markets? Its only drawbacks are that its unfamiliar/hard to interpret for some and labor intensive/requires alot of data an analysis?

#13

nuked

#14

Pg 47, paragraph 2 of cfai volume 6 mentions that implementation shortfall works well for to minimize opportunity costs, which are proxied by volatility. As a result IS works well for trending and volatile markets.

#15

…

#16

Implementation shortfall for the large volume of trading and concerns about costs. CPPI strategy for rebalancing of the portfolio.

#17

nope, buy and hold. volatile markets would be bad for CPPI. you would buy and sell at the wrong times.

#18

My thought on this one:

* Market is volatile, trending upward. The order is relatively large and It seems that the fund manager hv control with the timing and size of the CFs ( ie the manager has power over discretionary account)

If we use Imp-Shortfall, which stress on earlier execution. The execution costs( the market impacts) will be high as the large order went through in a short period of time in a volatile market. thus, i consider this strategy is not suitable.

Since the order is considered as large, which will dominate the daily trading volume ,therefore VWAP is not infomative and can be gamed.

so i go for TWAP…

#19

anyone know how many points for this question?..coz i got 0 i think

#20

I’m not sure. The CPPI strategy is not suitable when markets are reversing - i.e. fluctuating back/forth in a narrow price band. In the case the B&H strategy is also unfit - only Constant Mix. However, in volatile and trending upward markets the CPPI will outperform B&H since m>1 whereas for B&H m=1, and thus the convex nature of payoff. The client also stipulated a cushion in 170k dollars and something was said about her risk tolerance. I’m trying to find out the point.