Optimal Liquidity Provision

Christoph Kühn and Johannes Muhle-Karbe
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Christoph Kühn: Goethe University Frankfurt
Johannes Muhle-Karbe: University of Michigan at Ann Arbor

No 13-71, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

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.

Keywords: Limit order markets; optimal liquidity provision; asymptotics (search for similar items in EconPapers)
JEL-codes: G11 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2013-02
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1371

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