TWAP
Prices are susceptible to noise and volatility. Therefore, financial applications often average prices over time. Well-known methods include Moving Average, Exponential Smoothing, Time-weighted Average Price (TWAP), and Volume-weighted Average Price (VWAP)
Definition
TWAP (Time-Weighted Average Price) - calculates an average value over a specified time period, weighting each data point by the duration or frequency of updates.
TWAP is calculated as follows:
where is the value of the at the -th measurement and is the change in time since the previous measurement.
Rationale and Properties
Reduces the impact of rapid fluctuations in the data by spreading them out over time.
Incorporates time factors, making the final output reflective of trends rather than single-point events.
Offers smoother price data for algorithmic trading and liquidity management.
Limitations
Less appropriate sensitive to fast market shifts or abrupt changes -smoothing over time makes TWAP less responsive than other algorithms.
Requires additional storage of the historic data.
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