Dynamic Model of Market with Uninformed Market Maker

0483753 - ÚTIA 2018 RIV CZ eng J - Journal Article
Šmíd, Martin - Kopa, Miloš
Dynamic Model of Market with Uninformed Market Maker.
Kybernetika. Roč. 53, č. 5 (2017), s. 922-958. ISSN 0023-5954
R&D Projects: GA ČR(CZ) GBP402/12/G097
Institutional support: RVO:67985556
Keywords : market maker * optimal decision * price and inventory * high frequency data * dynamic model
OECD category: Statistics and probability
Impact factor: 0.632, year: 2017
http://www.library.utia.cas.cz/separaty/2017/E/smid-0483753.pdf

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.
Permanent Link: http://hdl.handle.net/11104/0279514