Optimal Liquidity Provision
Trading and Market Microstructure
2015-02-27 v3 Optimization and Control
Probability
Portfolio Management
Abstract
A small investor provides liquidity at the best bid and ask prices of a limit order market. For small spreads and frequent orders of other market participants, we explicitly determine the investor's optimal policy and welfare. In doing so, we allow for general dynamics of the mid price, the spread, and the order flow, as well as for arbitrary preferences of the liquidity provider under consideration.
Keywords
Cite
@article{arxiv.1309.5235,
title = {Optimal Liquidity Provision},
author = {Christoph Kühn and Johannes Muhle-Karbe},
journal= {arXiv preprint arXiv:1309.5235},
year = {2015}
}
Comments
22 pages, to appear in "Stochastic Processes and Their Applications"