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Optimal Liquidity Provision in Limit Order Markets

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  • Christoph K\"uhn
  • Johannes Muhle-Karbe
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    Abstract

    A small investor provides liquidity at the best bid and ask prices of a limit order market. For small spreads and frequent orders of other market participants, we explicitly determine the investor's optimal policy and welfare. In doing so, we allow for general dynamics of the mid price, the spread, and the order flow, as well as for arbitrary preferences of the liquidity provider under consideration.

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    File URL: http://arxiv.org/pdf/1309.5235
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    Bibliographic Info

    Paper provided by arXiv.org in its series Papers with number 1309.5235.

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    Date of creation: Sep 2013
    Date of revision: May 2014
    Handle: RePEc:arx:papers:1309.5235

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