Market Making with Model Uncertainty
Pari-mutuel markets are trading platforms through which the common market maker simultaneously clears multiple contingent claims markets. This market has several distinctive properties that began attracting the attention of the financial industry in the 2000s. For example, the platform aggregates liquidity from the individual contingent claims market into the common pool while shielding the market maker from potential financial loss. The contribution of this paper is two-fold. First, we provide a new economic interpretation of the market-clearing strategy of a pari-mutuel market that is well known in the literature. The pari-mutuel auctioneer is shown to be equivalent to the market maker with extreme ambiguity aversion for the future contingent event. Second, based on this theoretical understanding, we present a new market-clearing algorithm called the Knightian Pari-mutuel Mechanism (KPM). The KPM retains many interesting properties of pari-mutuel markets while explicitly controlling for the market maker's ambiguity aversion. In addition, the KPM is computationally efficient in that it is solvable in polynomial time.
Code (0)
등록된 구현이 없습니다.
Tasks
modelSimilar Papers 제목 키워드 기반
Adapting to a Market Shock: Optimal Sequential Market-Making
We study the profit-maximization problem of a monopolistic market-maker who sets two-sided prices in an asset market. The sequential decision problem is hard to solve because the state space is a function. We demonstrate…
LiveTradeBench: Seeking Real-World Alpha with Large Language Models
Large language models (LLMs) achieve strong performance across benchmarks--from knowledge quizzes and math reasoning to web-agent tasks--but these tests occur in static settings, lacking real dynamics and uncertainty. Co…
Decision MakingBandits in Matching Markets: Ideas and Proposals for Peer Lending
Motivated by recent applications of sequential decision making in matching markets, in this paper we attempt at formulating and abstracting market designs for P2P lending. We describe a paradigm to set the stage for how …
Decision MakingFairnessSequential Decision MakingMarket making by an FX dealer: tiers, pricing ladders and hedging rates for optimal risk control
Dealers make money by providing liquidity to clients but face flow uncertainty and thus price risk. They can efficiently skew their prices and wait for clients to mitigate risk (internalization), or trade with other deal…
PositionConformal Prediction for Stochastic Decision-Making of PV Power in Electricity Markets
This paper studies the use of conformal prediction (CP), an emerging probabilistic forecasting method, for day-ahead photovoltaic power predictions to enhance participation in electricity markets. First, machine learning…
Conformal PredictionDecision MakingUncertainty Quantification