nep-mst New Economics Papers
on Market Microstructure
Issue of 2019‒11‒25
three papers chosen by
Thanos Verousis

  1. Inference for Volatility Functionals of Multivariate It\^o Semimartingales Observed with Jump and Noise By Richard Y. Chen
  2. Reinforcement Learning for Market Making in a Multi-agent Dealer Market By Sumitra Ganesh; Nelson Vadori; Mengda Xu; Hua Zheng; Prashant Reddy; Manuela Veloso
  3. A two-player price impact game By Moritz Vo{\ss}

  1. By: Richard Y. Chen
    Abstract: This paper presents the nonparametric inference for nonlinear volatility functionals of general multivariate It\^o semimartingales, in high-frequency and noisy setting. Pre-averaging and truncation enable simultaneous handling of noise and jumps. Second-order expansion reveals explicit biases and a pathway to bias correction. Estimators based on this framework achieve the optimal convergence rate. A class of stable central limit theorems are attained with estimable asymptotic covariance matrices. This paper form a basis for infill asymptotic results of, for example, the realized Laplace transform, the realized principal component analysis, the continuous-time linear regression, and the generalized method of integrated moments, hence helps to extend the application scopes to more frequently sampled noisy data.
    Date: 2018–10
  2. By: Sumitra Ganesh; Nelson Vadori; Mengda Xu; Hua Zheng; Prashant Reddy; Manuela Veloso
    Abstract: Market makers play an important role in providing liquidity to markets by continuously quoting prices at which they are willing to buy and sell, and managing inventory risk. In this paper, we build a multi-agent simulation of a dealer market and demonstrate that it can be used to understand the behavior of a reinforcement learning (RL) based market maker agent. We use the simulator to train an RL-based market maker agent with different competitive scenarios, reward formulations and market price trends (drifts). We show that the reinforcement learning agent is able to learn about its competitor's pricing policy; it also learns to manage inventory by smartly selecting asymmetric prices on the buy and sell sides (skewing), and maintaining a positive (or negative) inventory depending on whether the market price drift is positive (or negative). Finally, we propose and test reward formulations for creating risk averse RL-based market maker agents.
    Date: 2019–11
  3. By: Moritz Vo{\ss}
    Abstract: We study the competition of two strategic agents for liquidity in the benchmark portfolio tracking setup of Bank, Soner, Voss (2017), both facing common aggregated temporary and permanent price impact \`a la Almgren and Chriss (2001). The resulting stochastic linear quadratic differential game with terminal state constraints allows for an explicitly available open-loop Nash equilibrium in feedback form. Our results reveal how the equilibrium strategies of the two players take into account the other agent's trading targets: either in an exploitative intent or by providing liquidity to the competitor, depending on the ratio between temporary and permanent price impact. As a consequence, different behavioral patterns can emerge as optimal in equilibrium. These insights complement existing studies in the literature on predatory trading models examined in the context of optimal portfolio liquidation problems.
    Date: 2019–11

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