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Dealing with the Inventory Risk

Guéant, Olivier; Lehalle, Charles-Albert; Tapia, Joaquin Fernandez (2011), Dealing with the Inventory Risk. https://basepub.dauphine.fr/handle/123456789/7390

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Type
Document de travail / Working paper
Date
2011
Publisher
Université Paris-Dauphine
Series title
Cahiers de la Chaire Finance et Développement Durable
Series number
43
Published in
Paris
Pages
31
Metadata
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Author(s)
Guéant, Olivier
Lehalle, Charles-Albert cc
Tapia, Joaquin Fernandez
Abstract (EN)
Market makers have to 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 they indeed provide liquidity, is challenged by the price risk they bear due to their inventory. In this paper, we provide optimal bid and ask quotes and closed-form approximations are derived using spectral arguments.
Subjects / Keywords
Trading process; Stocks; Risk; Inventory
JEL
G1 - General Financial Markets