Dynamic model of market with uninformed market maker

Martin Šmíd; Miloš Kopa

Kybernetika (2017)

  • Volume: 53, Issue: 5, page 922-958
  • ISSN: 0023-5954

Abstract

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We model a market with multiple liquidity takers and a single market maker maximizing his discounted consumption while keeping a prescribed probability of bankruptcy. We show that, given this setting, spread and price bias (a difference between the midpoint- and the expected fair price) depend solely on the MM's inventory and his uncertainty concerning the fair price. Tested on ten-second data from ten US electronic markets, our model gives significant results with the price bias decreasing in the inventory and increasing in the uncertainty and with the spread mostly increasing in the uncertainty.

How to cite

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Šmíd, Martin, and Kopa, Miloš. "Dynamic model of market with uninformed market maker." Kybernetika 53.5 (2017): 922-958. <http://eudml.org/doc/294356>.

@article{Šmíd2017,
abstract = {We model a market with multiple liquidity takers and a single market maker maximizing his discounted consumption while keeping a prescribed probability of bankruptcy. We show that, given this setting, spread and price bias (a difference between the midpoint- and the expected fair price) depend solely on the MM's inventory and his uncertainty concerning the fair price. Tested on ten-second data from ten US electronic markets, our model gives significant results with the price bias decreasing in the inventory and increasing in the uncertainty and with the spread mostly increasing in the uncertainty.},
author = {Šmíd, Martin, Kopa, Miloš},
journal = {Kybernetika},
keywords = {market maker; optimal decision; price and inventory; high frequency data; dynamic model},
language = {eng},
number = {5},
pages = {922-958},
publisher = {Institute of Information Theory and Automation AS CR},
title = {Dynamic model of market with uninformed market maker},
url = {http://eudml.org/doc/294356},
volume = {53},
year = {2017},
}

TY - JOUR
AU - Šmíd, Martin
AU - Kopa, Miloš
TI - Dynamic model of market with uninformed market maker
JO - Kybernetika
PY - 2017
PB - Institute of Information Theory and Automation AS CR
VL - 53
IS - 5
SP - 922
EP - 958
AB - We model a market with multiple liquidity takers and a single market maker maximizing his discounted consumption while keeping a prescribed probability of bankruptcy. We show that, given this setting, spread and price bias (a difference between the midpoint- and the expected fair price) depend solely on the MM's inventory and his uncertainty concerning the fair price. Tested on ten-second data from ten US electronic markets, our model gives significant results with the price bias decreasing in the inventory and increasing in the uncertainty and with the spread mostly increasing in the uncertainty.
LA - eng
KW - market maker; optimal decision; price and inventory; high frequency data; dynamic model
UR - http://eudml.org/doc/294356
ER -

References

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