Optimal Market Dealing Under Constraints

Etienne Chevalier (), M’hamed Gaïgi (), Vathana Ly Vath () and Mohamed Mnif ()
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Etienne Chevalier: Université d’Evry
M’hamed Gaïgi: University of Tunis El Manar
Vathana Ly Vath: Université d’Evry
Mohamed Mnif: University of Tunis El Manar

Journal of Optimization Theory and Applications, 2017, vol. 173, issue 1, No 15, 313-335

Abstract: Abstract We consider a market dealer acting as a liquidity provider by continuously setting bid and ask prices for an illiquid asset in a quote-driven market. The market dealer may benefit from the bid–ask spread, but has the obligation to permanently quote both prices while satisfying some liquidity and inventory constraints. The objective is to maximize the expected utility from terminal liquidation value over a finite horizon and subject to the above constraints. We characterize the value function as the unique viscosity solution to the associated Hamilton–Jacobi–Bellman equation, and further enrich our study with numerical results. The contributions of our study concern both the modelling aspects and the dynamic structure of the control strategies. Important features and constraints characterizing market making problems are no longer ignored.

Keywords: Stochastic control; Viscosity solutions; Market maker; Inventory constraints; 60G40; 91B70; 93E20 (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1007/s10957-016-1040-9

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