Optimal market-Making strategies under synchronised order arrivals with deep neural networks

So Eun Choi, Hyun Jin Jang, Kyungsub Lee and Harry Zheng

Journal of Economic Dynamics and Control, 2021, vol. 125, issue C

Abstract: This study investigates the optimal execution strategy of market-making for market and limit order arrival dynamics under a novel framework that includes a synchronised factor between buy and sell order arrivals. Using statistical tests, we empirically confirm that a synchrony propensity appears in the market, where a buy order arrival tends to follow the sell order’s long-term mean level and vice versa. This is presumably closely related to the drastic increase in the influence of high-frequency trading activities in markets. To solve the high-dimensional Hamilton–Jacobi–Bellman equation, we propose a deep neural network approximation and theoretically verify the existence of a network structure that guarantees a sufficiently small loss function. Finally, we implement the terminal profit and loss profile of market-making using the estimated optimal strategy and compare its performance distribution with that of other feasible strategies. We find that our estimation of the optimal market-making placement allows significantly stable and steady profit accumulation over time through the implementation of strict inventory management.

Keywords: Optimal strategy; Order arrival models; Synchrony; High-dimensional hamilton-Jacobi-Bellman; Deep neural network (search for similar items in EconPapers)
JEL-codes: C22 C63 G13 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:125:y:2021:i:c:s0165188921000336

DOI: 10.1016/j.jedc.2021.104098

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