Dealing with the Inventory Risk

Guéant, Olivier; Lehalle, Charles-Albert; Tapia, Joaquin Fernandez

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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CAHIER-CHAIRE-43.pdf (1.214Mb)

Type

Document de travail / Working paper

Date

2011

Éditeur

Université Paris-Dauphine

Titre de la collection

Cahiers de la Chaire Finance et Développement Durable

Numéro dans la collection

Ville d’édition

Paris

Métadonnées

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Auteur(s)

Guéant, Olivier
Lehalle, Charles-Albert

Tapia, Joaquin Fernandez

Résumé (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.