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Robustness in Sequential Decision Making under Evolving Uncertainty: Evidence from High-Frequency Market Making

Author

Listed:
  • Ying Chen
  • Hoa Nguyen
  • Julian Sester
  • Hoang Hai Tran
  • Yijiong Zhang

Abstract

We study sequential decision making under evolving uncertainty in high-frequency financial markets, where changing market dynamics continually challenge static decision policies. We show that robustness has two economically meaningful dimensions: uncertainty tolerance, which determines how much uncertainty the decision maker allows, and action robustness, which governs how conservatively decisions respond. Robustness is not merely protection against model misspecification, but a state-dependent mechanism that reshapes sequential decision behaviors. Simulation and empirical evidence show that action robustness has a substantially larger impact than uncertainty tolerance. Moreover, excessive robustness may reduce profitability in illiquid markets by limiting execution opportunities.

Suggested Citation

  • Ying Chen & Hoa Nguyen & Julian Sester & Hoang Hai Tran & Yijiong Zhang, 2026. "Robustness in Sequential Decision Making under Evolving Uncertainty: Evidence from High-Frequency Market Making," Papers 2607.08291, arXiv.org.
    • Handle: RePEc:arx:papers:2607.08291
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    References listed on IDEAS

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