EconPapers    
Economics at your fingertips  
 

Intraday market making with overnight inventory costs

Tobias Adrian, Agostino Capponi, Michael Fleming (), Erik Vogt and Hongzhong Zhang

Journal of Financial Markets, 2020, vol. 50, issue C

Abstract: The U.S. Treasury market is highly intermediated by non-bank principal trading firms (PTFs). Limited capital forces PTFs to end the trading day close to flat. We construct a continuous time market making model to analyze the trade-off faced by a profit maximizing firm with overnight inventory costs, and develop closed-form representations of the optimal price policy functions. Our model reveals that bid-ask spreads widen as the end of the trading day approaches, and that increases in order arrival rates do not always lead to higher price volatility. Our empirical analysis shows that Treasury security trading costs increase as the close of trading approaches, consistent with model predictions.

Keywords: Market microstructure theory; Market liquidity; Market making; Financial intermediation (search for similar items in EconPapers)
JEL-codes: G12 G17 G23 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1386418120300331
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Intraday market making with overnight inventory costs (2016) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:50:y:2020:i:c:s1386418120300331

DOI: 10.1016/j.finmar.2020.100564

Access Statistics for this article

Journal of Financial Markets is currently edited by B. Lehmann, D. Seppi and A. Subrahmanyam

More articles in Journal of Financial Markets from Elsevier
Bibliographic data for series maintained by Haili He ().

 
Page updated 2021-01-29
Handle: RePEc:eee:finmar:v:50:y:2020:i:c:s1386418120300331