Algorithmic market making for options
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Publication:5014175
DOI10.1080/14697688.2020.1766099zbMATH Open1479.91388arXiv1907.12433OpenAlexW3047014426MaRDI QIDQ5014175FDOQ5014175
Authors: Bastien Baldacci, Philippe Bergault, Olivier Guéant 
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
Recommendations
Derivative securities (option pricing, hedging, etc.) (91G20) Financial markets (91G15) Optimal stochastic control (93E20)
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Cited In (10)
- Closed-form Approximations in Multi-asset Market Making
- Optimal market making in the foreign exchange market
- A data-driven deep learning approach for options market making
- Computational Methods for Market Making Algorithms
- Size matters for OTC market makers: General results and dimensionality reduction techniques
- A Mean-Field Game of Market-Making against Strategic Traders
- INVENTORY HEDGING AND OPTION MARKET MAKING
- Market making with inventory control and order book information
- Deep reinforcement learning for market making in corporate bonds: beating the curse of dimensionality
- Algorithmic market making in dealer markets with hedging and market impact
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