Research Seminar Labex ReFi -The Behavior of Dealers and Clients on the European Corporate Bond Market: the Case of Multi-Dealer-to-Client Platforms, with Olivier Guéant, Université Paris 1 Panthéon Sorbonne
(CV & Bio here)
Université Paris 1 Panthéon Sorbonne
The Behavior of Dealers and Clients on the European Corporate
Market makers provide liquidity to other market participants: they propose prices at which they stand ready to buy and sell a wide variety of assets. They face a complex optimization problem with both static and dynamic components. They need indeed to propose bid and oﬀer/ask prices in an optimal way for making money out of the diﬀerence between these two prices (their bid-ask spread). Since they seldom buy and sell simultaneously, and therefore hold long or short inventories, they also need to mitigate the risk associated with price changes, and subsequently skew their quotes dynamically. In this paper, (i) we propose a general modeling framework which generalizes (and reconciles)thevariousmodelingapproachesproposedintheliteraturesincethepublication of the seminal paper “High-frequency trading in a limit order book” by Avellaneda and Stoikov, (ii) we prove new general results on the existence and the characterization of optimal market making strategies, (iii) we obtain new closed-form approximations for the optimal quotes, (iv) we extend the modeling framework to the case of multi-asset market making, and (v) we show how the model can be used in practice in the speciﬁc (and original) case of two credit indices.
|(Past and coming events)|