Volume Weighted Average Price (VWAP) Definition
The volume weighted average price (VWAP) is a method in which the total amount traded in every transaction is divided by the total number of shares traded for the day. VWAP is then regarded as the ratio of the value traded (total amount) to the volume traded (total shares) for a day.
VWAP is commonly used in pension plans, it can also be used in securities and stock exchange market. VWAP is used to measure the average price of a stock over a period, the average price of a stock is weighted by the total trading volume for the day.
A Little More on What is Volume Weighted Average Price
Volume-weighted average price (VWAP) weighs the transactions in the stock market as to whether it was a good trade or a bad one. It reflects the average stock price by to the volume traded for a certain period. Investors, when trading in the stock market use the VWAP ratio when trading in order not to affect market prices.
Also, if the price of a buy trade is lower than the VWAP, it is a good trade. If the price is however higher than the VWAP, the trade is not so good.
The use of Volume Weighted Average Price (VWAP) entails that every market detail is recorded without any omission. This will aid an accurate calculation of stock exchange data (the ratio of the value traded to the volume traded) for the day. Institutional investors and investment houses often make use of VWAP calculations.
While individual investors may have no problem with using bit-by-bit trading data to keep track of VWAP for a day, large institutional investors rely on detailed record of the trading data. The calculation method used by these categories of investors may also vary due to the type of trading data at their disposal.
Disturbance in the stock market is what many investors want to avoid, this is why large institutional buyers and mutual funds embrace VWAP so that will not disturb the market and the dynamic of a stock price with their large orders. Using the VWAP, these investors move their stocks strategically so as not to cause increase in sick price. Aside from this, VWAP performs other of functions. Using the VWAP technique, large institutional buyers and mutual funds buying purchasing shares under the intraday VWAP moving average. This stipulates that they can assume a stock position without elevating or disrupting the stock price.
Generally, investors (whether large investors or individual investors) do not use VWAP more than a day. This is due to the cumulative attribute of VWAP which causes increase in data over line periods of time. The increasing dataset presented by VWAP can result in a straggle or linger between the moving average and the real VWAP which is not totally reliable or safe for investors.
References for Volume Weighted Average Price
Academic Research on Volume Weighted Average Price
Optimal slice of a VWAP trade, Konishi, H. (2002). Journal of Financial Markets, 5(2), 197-221.
Improving VWAP strategies: A dynamic volume approach, Białkowski, J., Darolles, S., & Le Fol, G. (2008). Journal of Banking & Finance, 32(9), 1709-1722.
Competitive algorithms for VWAP and limit order trading, Kakade, S. M., Kearns, M., Mansour, Y., & Ortiz, L. E. (2004, May). In Proceedings of the 5th ACM conference on Electronic commerce (pp. 189-198). ACM.
Optimal execution of a VWAP order: a stochastic control approach, Frei, C., & Westray, N. (2015). Mathematical Finance, 25(3), 612-639.
Optimal VWAP trading under noisy conditions, Humphery-Jenner, M. L. (2011). Journal of Banking & Finance, 35(9), 2319-2329.
Vwap and volume profiles, Hobson, D. D. (2006). The Journal of Trading, 1(2), 38-42.
VWAP execution and guaranteed VWAP, Guéant, O., & Royer, G. (2014). SIAM Journal on Financial Mathematics, 5(1), 445-471.
VWAP cost excluding own trades, Hu, G. (2007).
Choosing Benchmarks vs. Choosing Strategies: Part 1—Execution Benchmarks: VWAP or Pretrade Prices, Sofianos, G. (2006). Trading, 2006(1), 71-74.
Mean variance optimal VWAP trading, McCulloch, J., & Kazakov, V. (2012).
On-line VWAP trading strategies, Fuh, C. D., Teng, H. W., & Wang, R. H. (2010). Sequential Analysis, 29(3), 292-310.
Effective and simple VWAP options pricing model, Buryak, A., & Guo, I. (2014). International Journal of Theoretical and Applied Finance, 17(06), 1450036.