Rousseau, Fabrice (2017) Strategic Market Making and Risk Sharing. Journal of Mathematical Finance, 7. pp. 144-179. ISSN 2162- 2442

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Abstract

We analyze the result of allowing a risk averse trader to split his order among risk averse market makers. We find that the market makers’ aggregate expected utility of profit can increase with the number of market markers and that the aggregate liquidity always increases with it. Despite this latter finding, we show that the cost of trading for the traders increases with the number of market makers as measured by their aggregate expected utility of profit. The larger the market makers’ risk aversion, the bigger that cost is. We also find that when the number of market makers tends to infinity, their aggregate expected utility of profit tends to zero. We also obtain that the market makers’ individual and aggregate expected utility of profit can increase with their risk aversion and that the trader’s expected utility of profit can increase or decrease with the market makers’ risk aversion. We offer a potential answer to the ongoing debate concerning the dealers’ competitiveness. Indeed, risk aversion reduces competition between market makers as it acts as a commitment for market makers to set higher prices. This commitment is higher the higher the risk aversion

Item Type:	Article
Keywords:	Risk Aversion; Strategic Market Makers; Strategic Traders; Splitting Orders;
Academic Unit:	Faculty of Social Sciences > Economics, Finance and Accounting
Item ID:	8427
Identification Number:	https://doi.org/10.4236/jmf.2017.71008
Depositing User:	Fabrice Rousseau
Date Deposited:	11 Jul 2017 10:37
Journal or Publication Title:	Journal of Mathematical Finance
Publisher:	Scientific Research Publishing Inc.
Refereed:	Yes
URI:	Publisher
Use Licence:	This item is available under a Creative Commons Attribution Non Commercial Share Alike Licence (CC BY-NC-SA). Details of this licence are available here

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