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http://dx.doi.org/10.7737/MSFE.2012.18.2.001

Stock Returns and Market Making with Inventory  

Park, Seyoung (Department of Industrial and Management Eng., POSTECH)
Jang, Bong-Gyu (Department of Industrial and Management Eng., POSTECH)
Publication Information
Management Science and Financial Engineering / v.18, no.2, 2012 , pp. 1-4 More about this Journal
Abstract
We study optimal trading strategy of a market maker with stock inventory. Following Avellaneda and Stoikov (2008), we assume the stock price follows a normal distribution. However, we take a constant expected rate of the stock return and assume that the stock volatility is an inverse function of the stock price level. We show that the optimal bid-ask spread of the market maker is wider for a higher expected rate of stock returns.
Keywords
Market Maker; Bid-Ask Spread; Stock Return; Stock Inventory; Dynamic Programming;
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