In this paper we extend the market-making models with inventory constraints of Avellaneda and Stoikov ("High-frequency trading in a limit-order book", Quantitative Finance Vol.8 No.3 2008) and Gueant, Lehalle and Fernandez-Tapia ("Dealing with inventory risk", Preprint 2011) to the case of a rather general class of mid…
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48 results for “Inventory risk”
This paper offers a mathematical framework to manage inventory risk in FX cash markets.
problem Inventory risk in FX cash markets due to flow uncertainty and volatility.
method Mathematical framework and approximation techniques for scalability.
result Maximizing expected profit while controlling inventory risk.
In this paper we complete and extend our previous work on stochastic control applied to high frequency market-making with inventory constraints and directional bets. Our new model admits several state variables (e.g. market spread, stochastic volatility and intensities of market orders) provided the full system is Mark…
Unified theory for optimal execution through signal-adaptive quotes in limit order books.
problem Optimal execution in limit order books with signal-dependent factors.
method Develops a unified solution theory for four execution criteria, incorporating signal-dependent drift, price impact, inventory risk, and execution risk.
result Explicit formulas reveal optimal quoting strategies and show signal-dependent drift can significantly affect execution.
We study Nash equilibria for inventory-averse high-frequency traders (HFTs), who trade to exploit information about future price changes. For discrete trading rounds, the HFTs' optimal trading strategies and their equilibrium price impact are described by a system of nonlinear equations; explicit solutions obtain aroun…
Modeling gas fee competition in decentralized exchanges to optimize arbitrage profits.
problem Gas fees and transaction ordering in decentralized exchanges create arbitrage opportunities.
method Developed a first equilibrium model of gas fee competition between two arbitrageurs under three transaction reversion settings.
result Mixed equilibria exist, and their characteristics depend on inventory risk and transaction settings.
A new algorithm avoids worst-case outcomes in risky contexts.
problem Risk-averse behavior in contextual bandits is challenging.
method Developed a first risk-averse contextual bandit algorithm with online regret guarantees.
result First algorithm with an online regret guarantee for risk-averse contextual bandits.
Paper tackles risk-sensitive decision-making under uncertainty.
problem Risk-sensitive decision-making problem under uncertainty.
method Formulated as a stochastic control problem, delineated necessary optimality conditions.
result Illustrative examples from optimal betting and inventory management support the theory.
Optimal Market Making in the Chinese Stock Market: A Stochastic Control and Scenario Analysisq-fin.PM
Study optimizes market making in Chinese stock market with stochastic control and scenario analysis.
problem Limited research on market making in Chinese stock market.
method Optimal market making framework with exponential CARA utility function, accounting for market conditions and risks.
result Impact of volatility and stamp duty on market maker's profit and liquidity.
The paper analyzes how open-end fund sales affect prices and returns.
problem How open-end fund sales impact prices and returns.
method Continuous-time market-clearing model to derive expected-return restrictions.
result Forced-sale pressure predicts actual fund selling and positive returns.
Market making is a fundamental trading problem in which an agent provides liquidity by continually offering to buy and sell a security. The problem is challenging due to inventory risk, the risk of accumulating an unfavourable position and ultimately losing money. In this paper, we develop a high-fidelity simulation of…
This paper optimizes perpetual contract liquidity by accounting for funding rates.
problem Optimal liquidity provision for perpetual contracts with stochastic funding rates.
method Formulated a control problem, solved with a HJB scheme, and calibrated on real data.
result Funding-aware market making improves performance and reduces inventory risk.
Brokers and an informed trader compete for liquidity, affecting trading costs and inventory risk.
problem How brokers and an informed trader manage liquidity and trading costs.
method Sequential Stackelberg game, solving for trading strategies, numerical solutions.
result Equilibrium strategies and liquidity prices determined, not Pareto efficient.
Market makers play an important role in providing liquidity to markets by continuously quoting prices at which they are willing to buy and sell, and managing inventory risk. In this paper, we build a multi-agent simulation of a dealer market and demonstrate that it can be used to understand the behavior of a reinforcem…
Modeling option market making with hedging-induced price impact.
problem Tackles the challenge of market making in options markets with price impact.
method Models option order flow using Cox processes and studies the dynamics of inventory and price under hedging-induced impact.
result Establishes the well-posedness of the mixed control problem involving quoting and hedging.
Study risk-sensitive market making with entropy regularization for better quote control.
problem Risk-sensitive market making with exponential utility and penalties.
method Entropy-regularized certainty-equivalent Bellman policies for discrete-time market dynamics.
result Proves convergence and performance bounds for entropy-regularized policies.
Study Nash competition among dealers quoting prices to clients with unknown trading motives.
problem Adverse selection and inventory costs in dealer-client interactions.
method Analyzes one-shot Nash competition with unknown client type and inventory constraints.
result Unique symmetric Nash equilibrium exists and can be characterized by a nonlinear ODE.
This paper examines how data affects risk measures in uncertain distributions.
problem How does distributional ambiguity affect risk measures?
method Formulated and derived simpler dual problems for infinite and finite dimensional robust moment problems.
result Developed theory and conducted experiments in inventory control and portfolio management.
The paper proposes a new algorithm for dealer markets that incorporates hedging and market impact.
problem How to manage risk and quote prices in dealer markets with limited internalization.
method Develops a mathematical model that allows dealers to hedge part of their inventory and adjust quotes based on inventory size.
result Dealers can internalize risk within a certain inventory range and externalize it outside of that range, optimizing their quoting strategy.
Study shows market makers can cooperate without communication.
problem Concerns of collusion in AI-driven market-making.
method Formulated as a repeated game, studied with Q-learning.
result Market makers can learn cooperative strategies without communication.
Optimal market making improves liquidity in prediction markets.
problem Efficient price discovery in prediction markets.
method Stochastic control framework for optimal market making.
result Optimal market quotes improve downside protection and profit.
Win-score promotion gates in aggregator-routed RFQ markets: A two-tier stochastic control modelq-fin.RM
Model analyzes RFQ markets using stochastic control to optimize dealer performance and inventory.
problem Optimizing market making in aggregator-routed RFQ markets with varying dealer performance scores.
method Two-tier stochastic control model that separates RFQ-level price competition from macro routing.
result Optimal controls can be expressed through derivatives of reduced Hamiltonians, leading to interpretable mappings from optimal win probabilities to optimal offsets.
A dealer manages quotes and rejection rules to control slippage risk in FX markets.
problem Managing inventory risk and latency risk in OTC FX market making.
method Dynamic programming and adiabatic-quadratic approximation to optimize quotes and rejection rules.
result Developed a method to optimize quotes and rejection rules for managing slippage risk.
We consider a finite-horizon market-making problem faced by a dark pool that executes incoming buy and sell orders. The arrival flow of such orders is assumed to be random and, for each transaction, the dark pool earns a per-share commission no greater than the half bid-ask spread. Throughout the entire period, the mai…
The paper develops a hybrid model for optimal order execution in markets with heterogeneous market makers.
problem Optimal liquidation in markets with limited inventory and risk capacity.
method Derives a reduced form model for aggregated inventory dynamics considering price impact.
result Optimal execution can be modeled as a linear-quadratic stochastic control problem.
Market makers continuously set bid and ask quotes for the stocks they have under consideration. Hence they face a complex optimization problem in which their return, based on the bid-ask spread they quote and the frequency at which they indeed provide liquidity, is challenged by the price risk they bear due to their in…
Market maker optimizes SPX and VIX spread using quadratic rough Heston model.
problem Maximizing profit from SPX and VIX spread while managing inventory risk.
method Uses quadratic rough Heston model to optimize multi-asset market making problem, approximating high-dimensional optimization.
result Asymptotic closed-form solution for optimization problem.
Paper introduces privacy-preserving inventory policy learning for feature-based newsvendor with unknown demand.
problem Privacy-preserving inventory policy learning for feature-based newsvendor with unknown demand distribution and nonsmooth loss function.
method Developed a clipped noisy gradient descent algorithm based on convolution smoothing for optimal inventory estimation within f-differential privacy framework.
result Achieved privacy-preserving optimal inventory policy with provable privacy guarantees and desirable statistical precision.
Study shows marketable order routing to wholesalers benefits all traders, leading to lower market depth and price volatility.
problem Determining the preference of retail traders for marketable order routing.
method Two models: one for market makers competing for retail order flow (Bertrand model) and another for price-taking competitive liquidity providers (open exchange model).
result Routing marketable orders to wholesalers is preferred by all traders, leading to mean reverting inventories and lower market depth.
Unified framework connects two market-making models, revealing their underlying equivalence.
problem Independent calibration of two market-making frameworks (Avellaneda-Stoikov and Cartea-Jaimungal).
method Axiomatic approach to market preference functional, showing equivalence under specific conditions.
result Avellaneda-Stoikov and Cartea-Jaimungal frameworks are equivalent under certain conditions.
Study bond market making with hit-ratio target using optimal control and HJB equations.
problem Optimizing bond market making with hit-ratio target in OTC markets.
method Stochastic optimal control approach, dualizing hit-ratio target, HJB equation, Riccati equation, linearization.
result Explicit quote decompositions into riskless spread, inventory-risk correction, and hit-ratio correction.
Modeling financial chaos with market makers' risk appetite.
problem Unpredictable price changes in financial markets.
method Using Hamiltonian approach with anharmonic oscillators and nonlinear coupling.
result Market makers' risk appetite determines chaotic dynamics in financial markets.
Modeling informed trading with risk-averse market makers.
problem Understanding informed trading and its impact on market liquidity and risk premia.
method Connections between optimal transport theory and Kyle's model, including new characterizations of profits and duality.
result Liquidity is lower, assets exhibit short-term reversals, and risk premia depend on market maker inventories, which are mean reverting.
Bayesian optimization improves forest inventory sampling using remote sensing data.
problem Optimizing forest inventory sampling in large areas with limited data.
method Bayesian optimization applied to RS data for improved sampling design.
result The proposed method outperforms baseline methods in terms of MSE values.
Study finds inventory inaccuracies are linked to store activity and product perishability.
problem Inventory record inaccuracy in grocery retailing environments.
method Analysis of 24,000 SKUs across 11 stores, field quasi-experiment on audits.
result Inventory audits can boost sales by 11%, especially for perishable items.
A new approach integrates inventory prediction and routing optimization for better supply chain management.
problem Optimizing efficient route selection in supply chain management with uncertain inventory demand.
method Decision-focused learning approach using neural networks to directly integrate inventory prediction and routing optimization.
result Direct integration of inventory prediction and routing optimization leads to better supply chain decisions.
We propose a continuous-time stock-flow consistent model for inventory dynamics in an economy with firms, banks, and households. On the supply side, firms decide on production based on adaptive expectations for sales demand and a desired level of inventories. On the demand side, investment is determined as a function o…
Study optimal pricing and inventory control in dynamic settings with censored demand.
problem Optimal pricing and inventory control in dynamic settings with censored demand.
method Approximate optimal policy via high-order MDP, propose novel algorithms for solving Bellman equations.
result Established finite-sample regret bounds and demonstrated efficacy through numerical experiments.
Policy certifies inventory levels meeting service requirements.
problem Maintaining stock levels meeting service requirements despite unknown demand.
method Data-driven order policy using online learning and integral action.
result Valid inference method for finite samples.
Axiomatic Market Makingq-fin.MF
Axiomatizes the bid-ask market maker's quoting rule
problem Axiomatizing the quoting rule of a market maker
method Eight natural axioms and six environmental assumptions
result A unique three-parameter family emerges
Study on inventory control with changing demand, proposing adaptive algorithms.
problem Inventory control with non-stationary demand distributions.
method Adaptive online algorithms optimizing base-stock policies.
result Sharp separation in adaptability across different inventory models.
A contextual bandit method evaluates and improves inventory control policies.
problem Evaluating and improving periodic review inventory control policies with nonstationary demand.
method Contextual bandit-based algorithm to evaluate and tweak policies.
result The method achieves favorable guarantees in both theory and practice.
Value-Based Inventory Managementq-fin.PM
The basic financial purpose of a firm is to maximize its value. An inventory management system should also contribute to realization of this basic aim. Many current asset management models currently found in financial management literature were constructed with the assumption of book profit maximization as basic aim. H…
This thesis applies RL to market making in China's commodity market.
problem Leverage RL for market making in China's commodity market.
method Developed an automatic trading system using RL.
result RL is feasible for market making in China's commodity market.
We consider a continuous-time model for inventory management with Markov modulated non-stationary demands. We introduce active learning by assuming that the state of the world is unobserved and must be inferred by the manager. We also assume that demands are observed only when they are completely met. We first derive t…
Models to price long term loans in the securities lending business are developed. These longer horizon deals can be viewed as contracts with optionality embedded in them. This insight leads to the usage of established methods from derivatives theory to price such contracts. Numerical simulations are used to demonstrate…
Market making by an FX dealer: tiers, pricing ladders and hedging rates for optimal risk controlq-fin.TR
This paper offers a framework for FX dealers to decide between internalizing and externalizing their market making to balance risk control and costs.
problem FX dealers face risk from flow uncertainty and need to decide on internalization vs. externalization strategies.
method Develops an optimal control framework that balances pricing and hedging strategies.
result Provides insights into the trade-off between risk control and transaction costs in market making.
Deep neural networks optimize inventory decisions in complex supply chains.
problem Optimizing inventory decisions in stochastic multi-echelon supply chains.
method Pairwise modeling and DNN agents for order-up-to levels.
result The method performs better than alternate methods in general supply chain networks.