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Liquidity provision with adverse selection and inventory costs
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Herdegen, Martin, Muhle-Karbe, Johannes and Stebegg, Florian (2023) Liquidity provision with adverse selection and inventory costs. Mathematics of Operations Research, 48 (3). pp. 1286-1315. doi:10.1287/moor.2022.1294 ISSN 0364-765X.
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Official URL: https://doi.org/10.1287/moor.2022.1294
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 | ||||||||
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Subjects: | H Social Sciences > HB Economic Theory H Social Sciences > HD Industries. Land use. Labor |
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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: | August 2023 | ||||||||
Dates: |
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Volume: | 48 | ||||||||
Number: | 3 | ||||||||
Page Range: | pp. 1286-1315 | ||||||||
DOI: | 10.1287/moor.2022.1294 | ||||||||
Status: | Peer Reviewed | ||||||||
Publication Status: | Published | ||||||||
Access rights to Published version: | Restricted or Subscription Access | ||||||||
Copyright Holders: | Copyright © 2022, INFORMS | ||||||||
Date of first compliant deposit: | 20 July 2022 | ||||||||
Date of first compliant Open Access: | 14 September 2022 | ||||||||
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