How does VWAP compare to the Kalman filter? Using the same HSBC trades as the previous chart, we calculate the volume weighted average price at each trade time, covering all trades in the previous five minutes. Then plot the last VWAP figure in each five minute time period to match the previous time series.
The chart above shows that, like the Kalman filtered price, the moving VWAP also tracks the traded price, but the differences are noticeably larger. The average absolute difference from the last traded price is HKD 0.0152 for the Kalman filter and HKD 0.0235 for the 5 minute VWAP. That is around a third of a tick and half a tick respectively. A difference is to be expected, since VWAP is accounts for the volume traded at each price. Another point to consider when using VWAP is how wide the time window should be: the five minutes figure is arbitrary, albeit straightforward for clients to understand, and should instead be related to the the trading intensity of the listing. Which, of course, can vary during the day.