Deep Reinforcement Learning for Market Making in Corporate Bonds: Beating the Curse of Dimensionality

Olivier Guéant and Iuliia Manziuk
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Iuliia Manziuk: CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique

Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) from HAL

Abstract: In corporate bond markets, which are mainly OTC markets, market makers play a central role by providing bid and ask prices for bonds to asset managers. Determining the optimal bid and ask quotes that a market maker should set for a given universe of bonds is a complex task. The existing models, mostly inspired by the Avellaneda-Stoikov model, describe the complex optimization problem faced by market makers: proposing bid and ask prices for making money out of the difference between them while mitigating the market risk associated with holding inventory. While most of the models only tackle one-asset market making, they can often be generalized to a multi-asset framework. However, the problem of solving the equations characterizing the optimal bid and ask quotes numerically is seldom tackled in the literature, especially in high dimension. In this paper, we propose a numerical method for approximating the optimal bid and ask quotes over a large universe of bonds in a model à la Avellaneda–Stoikov. As classical finite difference methods cannot be used in high dimension, we present a discrete-time method inspired by reinforcement learning techniques, namely, a model-based deep actor-critic algorithm.

Keywords: Market making; Stochastic optimal control; Reinforcement learning; Actor-critic algorithms (search for similar items in EconPapers)
Date: 2019-09-03
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Citations: View citations in EconPapers (24)

Published in Applied Mathematical Finance, 2019, 26 (5), pp.387-452. ⟨10.1080/1350486X.2020.1714455⟩

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Working Paper: Deep Reinforcement Learning for Market Making in Corporate Bonds: Beating the Curse of Dimensionality (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:cesptp:hal-03252505

DOI: 10.1080/1350486X.2020.1714455

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