Optimal liquidity provision

DOI10.1016/J.SPA.2015.02.015MaRDI QIDQ2348293zbMATH OpenOpenAlexFDO

Authors Christoph Kühn, Johannes Muhle-Karbe

Publication date 11 June 2015

Published in Stochastic Processes and their Applications (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1309.5235

zbMATH Keywords

liquidityoptimal policylimit order market

Mathematics Subject Classification ID

Portfolio theory (91G10) Brownian motion (60J65) Financial applications of other theories (91G80)

Abstract: A small investor provides liquidity at the best bid and ask prices of a limit order market. For small spreads and frequent orders of other market participants, we explicitly determine the investor's optimal policy and welfare. In doing so, we allow for general dynamics of the mid price, the spread, and the order flow, as well as for arbitrary preferences of the liquidity provider under consideration.

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Cites work

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Cited in

(10)

• A Leland model for delta hedging in central risk books
• SDEs with two reflecting barriers driven by semimartingales and processes with bounded \(p\)-variation
• Inventory management in customised liquidity pools
• RESOLVING THE LIQUIDITY PUZZLE
• SDEs with two reflecting barriers driven by optional processes with regulated trajectories
• Limit order trading with a mean reverting reference price
• Continuous time trading of a small investor in a limit order market
• Optimal portfolios of a small investor in a limit order market: a shadow price approach
• Liquidity provision in capacity-constrained markets
• A continuous and efficient fundamental price on the discrete order book grid

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