Herdegen, Martin, Muhle-Karbe, Johannes and Stebegg, Florian (2022) Liquidity provision with adverse selection and inventory costs. Mathematics of Operations Research . doi:10.1287/moor.2022.1294 (In Press)

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Abstract

We study one-shot Nash competition between an arbitrary number of identical dealers that compete for the order flow of a client. The client trades either because of proprietary information, exposure to idiosyncratic risk, or a mix of both trading motives. When quoting their price schedules, the dealers do not know the client’s type but only its distribution, and in turn choose their price quotes to mitigate between adverse selection and inventory costs. Under essentially minimal conditions, we show that a unique symmetric Nash equilibrium exists and can be characterized by the solution of a nonlinear ordinary differential equation.

Item Type:	Journal Article
Subjects:	H Social Sciences > HB Economic Theory H Social Sciences > HD Industries. Land use. Labor
Divisions:	Faculty of Science, Engineering and Medicine > Science > Mathematics
Library of Congress Subject Headings (LCSH):	Liquidity (Economics) -- Mathematical models, Stocks -- Mathematical models, Competition -- Mathematical models, Equilibrium (Economics)
Journal or Publication Title:	Mathematics of Operations Research
Publisher:	Informs
ISSN:	0364-765X
Official Date:	8 September 2022
Dates:	Date Event 8 September 2022 Available 5 June 2022 Accepted
DOI:	10.1287/moor.2022.1294
Status:	Peer Reviewed
Publication Status:	In Press
Access rights to Published version:	Restricted or Subscription Access
Copyright Holders:	Copyright © 2022, INFORMS
Related URLs:	Publisher

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