Algorithmic market making for options
From MaRDI portal
Publication:5014175
DOI10.1080/14697688.2020.1766099zbMATH Open1479.91388arXiv1907.12433OpenAlexW3047014426MaRDI QIDQ5014175FDOQ5014175
Olivier Guéant, Philippe Bergault, Bastien Baldacci
Publication date: 1 December 2021
Published in: Quantitative Finance (Search for Journal in Brave)
Abstract: In this article, we tackle the problem of a market maker in charge of a book of options on a single liquid underlying asset. By using an approximation of the portfolio in terms of its vega, we show that the seemingly high-dimensional stochastic optimal control problem of an option market maker is in fact tractable. More precisely, when volatility is modeled using a classical stochastic volatility model -- e.g. the Heston model -- the problem faced by an option market maker is characterized by a low-dimensional functional equation that can be solved numerically using a Euler scheme along with interpolation techniques, even for large portfolios. In order to illustrate our findings, numerical examples are provided.
Full work available at URL: https://arxiv.org/abs/1907.12433
Derivative securities (option pricing, hedging, etc.) (91G20) Financial markets (91G15) Optimal stochastic control (93E20)
Cites Work
- Title not available (Why is that?)
- A Closed-Form Solution for Options with Stochastic Volatility with Applications to Bond and Currency Options
- Applied stochastic control of jump diffusions
- High-frequency trading in a limit order book
- Buy Low, Sell High: A High Frequency Trading Perspective
- Dealing with the inventory risk: a solution to the market making problem
- Algorithmic Trading with Model Uncertainty
- GENERAL INTENSITY SHAPES IN OPTIMAL LIQUIDATION
- Optimal high-frequency trading with limit and market orders
- Option market making under inventory risk
- Optimal market making
- The financial mathematics of market liquidity. From optimal execution to market making
- OPTIMAL HIGH‐FREQUENCY TRADING IN A PRO RATA MICROSTRUCTURE WITH PREDICTIVE INFORMATION
- Deep Reinforcement Learning for Market Making in Corporate Bonds: Beating the Curse of Dimensionality
- Size matters for OTC market makers: General results and dimensionality reduction techniques
Cited In (6)
- Closed-form Approximations in Multi-asset Market Making
- A data-driven deep learning approach for options market making
- Size matters for OTC market makers: General results and dimensionality reduction techniques
- A Mean-Field Game of Market-Making against Strategic Traders
- Market making with inventory control and order book information
- Algorithmic market making in dealer markets with hedging and market impact
This page was built for publication: Algorithmic market making for options
Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q5014175)
