On Optimal Pricing Model for Multiple Dealers in a Competitive Market

In this paper, the optimal pricing strategy in Avellande and Stoikov (Quant. Finance 8:217–224, 2008 ) for a monopolistic dealer is extended to a general situation where multiple dealers are present in a competitive market. The dealers’ trading intensities, their optimal bid and ask prices and there...

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Bibliographic Details
Published in:Computational economics 2019-01, Vol.53 (1), p.397-431
Main Authors: Yang, Qing-Qing, Gu, Jia-Wen, Ching, Wai-Ki, Siu, Tak-Kuen
Format: Article
Language:English
Subjects:
Behavioral/Experimental Economics
Business competition
Competition
Computer Appl. in Social and Behavioral Sciences
Economic Theory/Quantitative Economics/Mathematical Methods
Economics
Economics and Finance
Finance
Markets
Math Applications in Computer Science
Operations Research/Decision Theory
Optimal pricing
Prices
Pricing
Pricing policies
Profits
Trading
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Summary:In this paper, the optimal pricing strategy in Avellande and Stoikov (Quant. Finance 8:217–224, 2008 ) for a monopolistic dealer is extended to a general situation where multiple dealers are present in a competitive market. The dealers’ trading intensities, their optimal bid and ask prices and therefore their spreads are derived when the dealers are informed the severity of the competition. The effects of various parameters on the bid-ask quotes and profits of the dealers in the competitive market are also discussed. This study gives some insights on the average spread, profits of the dealers in the competitive trading environment.
ISSN:0927-7099
1572-9974
DOI:10.1007/s10614-017-9749-6