Dealing with the inventory risk: a solution to the market making problem
From MaRDI portal
Publication:367376
DOI10.1007/S11579-012-0087-0zbMATH Open1273.91462arXiv1105.3115OpenAlexW2120949767MaRDI QIDQ367376FDOQ367376
Olivier Guéant, Charles-Albert Lehalle, Joaquin Fernandez-Tapia
Publication date: 13 September 2013
Published in: Mathematics and Financial Economics (Search for Journal in Brave)
Abstract: Market makers continuously set bid and ask quotes for the stocks they have under consideration. Hence they face a complex optimization problem in which their return, based on the bid-ask spread they quote and the frequency at which they indeed provide liquidity, is challenged by the price risk they bear due to their inventory. In this paper, we consider a stochastic control problem similar to the one introduced by Ho and Stoll and formalized mathematically by Avellaneda and Stoikov. The market is modeled using a reference price following a Brownian motion with standard deviation , arrival rates of buy or sell liquidity-consuming orders depend on the distance to the reference price and a market maker maximizes the expected utility of its P&L over a finite time horizon. We show that the Hamilton-Jacobi-Bellman equations associated to the stochastic optimal control problem can be transformed into a system of linear ordinary differential equations and we solve the market making problem under inventory constraints. We also shed light on the asymptotic behavior of the optimal quotes and propose closed-form approximations based on a spectral characterization of the optimal quotes.
Full work available at URL: https://arxiv.org/abs/1105.3115
Cites Work
Cited In (47)
- Optimal Liquidity-Based Trading Tactics
- SIMULTANEOUS TRADING IN ‘LIT’ AND DARK POOLS
- Real-time market microstructure analysis: online transaction cost analysis
- Closed-form Approximations in Multi-asset Market Making
- Recent advances in reinforcement learning in finance
- High frequency market making: the role of speed
- Optimal Execution: A Review
- Optimal Market Making under Partial Information with General Intensities
- Adaptive optimal market making strategies with inventory liquidation cost
- Algorithmic trading in a microstructural limit order book model
- Optimal Make-Take Fees in a Multi Market-Maker Environment
- Optimal liquidity provision
- A data-driven deep learning approach for options market making
- Incorporating order-flow into optimal execution
- GENERAL INTENSITY SHAPES IN OPTIMAL LIQUIDATION
- RISK METRICS AND FINE TUNING OF HIGH‐FREQUENCY TRADING STRATEGIES
- Computational Methods for Market Making Algorithms
- MARKET MAKING AND PORTFOLIO LIQUIDATION UNDER UNCERTAINTY
- Algorithmic market making for options
- MARKET MAKING WITH ALPHA SIGNALS
- Algorithmic trading with learning
- Optimal high-frequency trading with limit and market orders
- Deep Reinforcement Learning for Market Making in Corporate Bonds: Beating the Curse of Dimensionality
- Optimal market-making strategies under synchronised order arrivals with deep neural networks
- Optimal Market Making with Persistent Order Flow
- Dynamics of market making algorithms in dealer markets: Learning and tacit collusion
- Towards multi‐agent reinforcement learning‐driven over‐the‐counter market simulations
- Optimal market dealing under constraints
- Size matters for OTC market makers: General results and dimensionality reduction techniques
- Optimal posting price of limit orders: learning by trading
- A Mean-Field Game of Market-Making against Strategic Traders
- Dynamic equilibrium of market making with price competition
- OPTIMAL HIGH‐FREQUENCY TRADING IN A PRO RATA MICROSTRUCTURE WITH PREDICTIVE INFORMATION
- On Bid and Ask Side-Specific Tick Sizes
- Trading strategy with stochastic volatility in a limit order book market
- TRADING STRATEGIES WITHIN THE EDGES OF NO-ARBITRAGE
- Price estimation via Bayesian filtering and optimal bid-ask prices for market makers
- Market making with inventory control and order book information
- Optimal market making in the presence of latency
- Inventory management in customised liquidity pools
- Optimal execution cost for liquidation through a limit order market
- Algorithmic Trading, Stochastic Control, and Mutually Exciting Processes
- High Frequency Trading and Asymptotics for Small Risk Aversion in a Markov Renewal Model
- Option market making under inventory risk
- Optimal order execution under price impact: a hybrid model
- Optimal market making
- Algorithmic market making in dealer markets with hedging and market impact
Recommendations
- Title not available (Why is that?) 👍 👎
- Market making with asymmetric information and inventory risk 👍 👎
- Optimal spot market inventory strategies in the presence of cost and price risk 👍 👎
- Optimal Market-Making with Risk Aversion 👍 👎
- Coherent risk measures in inventory problems 👍 👎
- A risk-averse inventory model with Markovian purchasing costs 👍 👎
- INVENTORY HEDGING AND OPTION MARKET MAKING 👍 👎
- Market making with inventory control and order book information 👍 👎
- Option market making under inventory risk 👍 👎
This page was built for publication: Dealing with the inventory risk: a solution to the market making problem
Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q367376)
