Optimal Market Making Models with Stochastic Volatility
Seminar in Insurance and Economics
SPEAKER: Burcu Aydoğan (RWTH Aachen University).
TITLE: Optimal Market Making Models with Stochastic Volatility.
ABSTRACT: We develop optimal market making models for high-frequency trading (HFT) in a limit order book (LOB) considering stock price processes with stochastic volatility which consist jumps either in price or volatility. By adding the jump processes, we measure the effect of the arrival of each marker orders on stock price. By such models, we obtain the optimal trading strategies via stochastic optimal control theory deciding for the best bid and ask prices that a market maker sets up. We write the related Hamilton-Jacobi-Bellman (HJB) equation for each control problem and then apply finite differences and interpolation/extrapolation methods after proposing a solution for each HJB equation in order to obtain the optimal policies. The results are performed on Borsa Istanbul Stock Exchange Market (BIST) high-frequency data by estimating the model parameters besides the artificial data applications. Further, we provide the applications of the models on some stocks traded in global markets and we get the conclusion of that the strategies are profitable and meaningful even traded on global stocks besides the developing markets.