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Optimal liquidity provision

Author

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  • Kühn, Christoph
  • Muhle-Karbe, Johannes

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.

Suggested Citation

  • Kühn, Christoph & Muhle-Karbe, Johannes, 2015. "Optimal liquidity provision," Stochastic Processes and their Applications, Elsevier, vol. 125(7), pages 2493-2515.
    • Handle: RePEc:eee:spapps:v:125:y:2015:i:7:p:2493-2515
    DOI: 10.1016/j.spa.2015.02.015
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    References listed on IDEAS

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    Cited by:

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    2. Baron Law & Frederi Viens, 2019. "Market Making under a Weakly Consistent Limit Order Book Model," Papers 1903.07222, arXiv.org, revised Jan 2020.

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