Optimal closing benchmarks

In financial markets, the closing price serves as an important benchmark. We introduce a market model to analyze the stability of the closing price with presence of three types of volume: distorting volume, volume that targets the closing price, and volume that is unrelated to the closing price. The optimal closing price is either the price from an auction or the volume weighted average price (VWAP) from regular trading only, explaining the prevalence of these closing benchmarks on financial markets. A succinct condition depending on the different volume types indicates when the inclusion of a closing auction is optimal.

Automated summary

The closing price is an important benchmark in financial markets, and its stability can be affected by different types of volume. Auction prices and volume weighted average prices are typically the optimal choices for determining the closing price, explaining the prevalence of these closing benchmarks on financial markets.