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Intraday Market Making with Overnight Inventory Costs

Author

Listed:
  • Adrian, Tobias
  • Capponi, Agostino
  • Vogt, Erik
  • Zhang, Hongzhong

Abstract

The Treasury market is increasingly intermediated by non-bank proprietary trading firms. These firms differ notably from incumbent dealers in that they tend to unwind inventories at the end of the day. To shed light on the impact these new intermediaries have on market quality, we model a market making proprietary trading firm that faces overnight inventory costs. The resulting inventory hedging demand generates rising price impact and widening bid-ask spreads as the end of the trading day approaches. These predictions are borne out in the U.S. Treasury data.

Suggested Citation

  • Adrian, Tobias & Capponi, Agostino & Vogt, Erik & Zhang, Hongzhong, 2017. "Intraday Market Making with Overnight Inventory Costs," CEPR Discussion Papers 12245, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:12245
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    References listed on IDEAS

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    More about this item

    Keywords

    Financial Intermediation; market liquidity; market making; Market microstructure theory;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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