Abstract:

We study how risk-averse market makers manage inventory by setting quotes in multiple assets.  As the correlation between assets increases, an inventory shock in one asset causes the market maker to quote more in other assets but less in the affected asset.  We predict that a more risk-averse market maker reaches zero inventory more often in each asset, engages less in hedging inventory across assets, and causes a lower asset return correlation at higher frequencies: the Epps effect.  Ignoring inventory cross-hedging by restricting analysis to a single asset leads to the underestimation of market maker risk aversion.

General information:

Attendance to this seminar is possible by invitation only. Please send an e-mail to finsec-abs@uva.nl if your are interested in attending this seminar.