Geodesic
Dynamic model of market with uninformed market maker
Kybernetika, Tome 53 (2017) no. 5, pp. 922-958
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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.
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.
DOI : 10.14736/kyb-2017-5-0922
Classification : 62P05, 91G80
Keywords: market maker; optimal decision; price and inventory; high frequency data; dynamic model 
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Šmíd, Martin; Kopa, Miloš. Dynamic model of market with uninformed market maker. Kybernetika, Tome 53 (2017) no. 5, pp. 922-958. doi: 10.14736/kyb-2017-5-0922

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