Optimal inventory management and order book modeling

Handle URI:
http://hdl.handle.net/10754/627529
Title:
Optimal inventory management and order book modeling
Authors:
Baradel, Nicolas; Bouchard, Bruno; Evangelista, David; Mounjid, Othmane
Abstract:
We model the behavior of three agent classes acting dynamically in a limit order book of a financial asset. Namely, we consider market makers (MM), high-frequency trading (HFT) firms, and institutional brokers (IB). Given a prior dynamic of the order book, similar to the one considered in the Queue-Reactive models [14, 20, 21], the MM and the HFT define their trading strategy by optimizing the expected utility of terminal wealth, while the IB has a prescheduled task to sell or buy many shares of the considered asset. We derive the variational partial differential equations that characterize the value functions of the MM and HFT and explain how almost optimal control can be deduced from them. We then provide a first illustration of the interactions that can take place between these different market participants by simulating the dynamic of an order book in which each of them plays his own (optimal) strategy.
KAUST Department:
Computer, Electrical and Mathematical Sciences and Engineering (CEMSE) Division
Publisher:
arXiv
Issue Date:
16-Feb-2018
ARXIV:
arXiv:1802.08135
Type:
Preprint
Additional Links:
http://arxiv.org/abs/1802.08135v1; http://arxiv.org/pdf/1802.08135v1
Appears in Collections:
Other/General Submission; Computer, Electrical and Mathematical Sciences and Engineering (CEMSE) Division

Full metadata record

DC FieldValue Language
dc.contributor.authorBaradel, Nicolasen
dc.contributor.authorBouchard, Brunoen
dc.contributor.authorEvangelista, Daviden
dc.contributor.authorMounjid, Othmaneen
dc.date.accessioned2018-04-16T11:27:44Z-
dc.date.available2018-04-16T11:27:44Z-
dc.date.issued2018-02-16en
dc.identifier.urihttp://hdl.handle.net/10754/627529-
dc.description.abstractWe model the behavior of three agent classes acting dynamically in a limit order book of a financial asset. Namely, we consider market makers (MM), high-frequency trading (HFT) firms, and institutional brokers (IB). Given a prior dynamic of the order book, similar to the one considered in the Queue-Reactive models [14, 20, 21], the MM and the HFT define their trading strategy by optimizing the expected utility of terminal wealth, while the IB has a prescheduled task to sell or buy many shares of the considered asset. We derive the variational partial differential equations that characterize the value functions of the MM and HFT and explain how almost optimal control can be deduced from them. We then provide a first illustration of the interactions that can take place between these different market participants by simulating the dynamic of an order book in which each of them plays his own (optimal) strategy.en
dc.publisherarXiven
dc.relation.urlhttp://arxiv.org/abs/1802.08135v1en
dc.relation.urlhttp://arxiv.org/pdf/1802.08135v1en
dc.rightsArchived with thanks to arXiven
dc.titleOptimal inventory management and order book modelingen
dc.typePreprinten
dc.contributor.departmentComputer, Electrical and Mathematical Sciences and Engineering (CEMSE) Divisionen
dc.eprint.versionPre-printen
dc.contributor.institutionUniversité Paris-Dauphine, PSL Research University, CNRS, CEREMADE, Paris.en
dc.contributor.institutionCMAP, École Polytechnique.en
dc.identifier.arxividarXiv:1802.08135en
kaust.authorEvangelista, Daviden
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