Does the market maker stabilize the market?

Zhu, M; Chiarella, C; He, XZ; Wang, D

Does the market maker stabilize the market?

Zhu, M Chiarella, C He, XZ

Wang, D

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Publication Type:: Journal Article
Citation:: Physica A: Statistical Mechanics and its Applications, 2009, 388 (15-16), pp. 3164 - 3180
Issue Date:: 2009-05-25

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Field	Value	Language
dc.contributor.author	Zhu, M	en_US
dc.contributor.author	Chiarella, C	en_US
dc.contributor.author	He, XZ https://orcid.org/0000-0003-1446-9996	en_US
dc.contributor.author	Wang, D	en_US
dc.date.issued	2009-05-25	en_US
dc.identifier.citation	Physica A: Statistical Mechanics and its Applications, 2009, 388 (15-16), pp. 3164 - 3180	en_US
dc.identifier.issn	0378-4371	en_US
dc.identifier.uri	http://hdl.handle.net/10453/8289
dc.description.abstract	The market maker plays an important role in price formation, but his/her behavior and stabilizing impact on the market are relatively unclear, in particular in speculative markets. This paper develops a financial market model that examines the impact on market stability of the market maker, who acts as both a liquidity provider and an active investor in a market consisting of two types of boundedly rational speculative investors-the fundamentalists and trend followers. We show that the market maker does not necessarily stabilize the market when he/she actively manages the inventory to maximize profits, and that rather the market maker's impact depends on the behavior of the speculators. Numerical simulations show that the model is able to generate outcomes for asset returns and market inventories that are consistent with empirical findings. © 2009.	en_US
dc.relation.ispartof	Physica A: Statistical Mechanics and its Applications	en_US
dc.relation.isbasedon	10.1016/j.physa.2009.04.013	en_US
dc.subject.classification	Fluids & Plasmas	en_US
dc.title	Does the market maker stabilize the market?	en_US
dc.type	Journal Article
utslib.citation.volume	15-16	en_US
utslib.citation.volume	388	en_US
utslib.for	0105 Mathematical Physics	en_US
utslib.for	0102 Applied Mathematics	en_US
utslib.for	0206 Quantum Physics	en_US
pubs.embargo.period	Not known	en_US
pubs.organisational-group	/University of Technology Sydney
pubs.organisational-group	/University of Technology Sydney/Faculty of Business
pubs.organisational-group	/University of Technology Sydney/Faculty of Business/Finance Discipline
pubs.organisational-group	/University of Technology Sydney/Strength - QFRC - Quantitative Finance Research Centre
utslib.copyright.status	open_access
pubs.issue	15-16	en_US
pubs.publication-status	Published	en_US
pubs.volume	388	en_US

Abstract:

The market maker plays an important role in price formation, but his/her behavior and stabilizing impact on the market are relatively unclear, in particular in speculative markets. This paper develops a financial market model that examines the impact on market stability of the market maker, who acts as both a liquidity provider and an active investor in a market consisting of two types of boundedly rational speculative investors-the fundamentalists and trend followers. We show that the market maker does not necessarily stabilize the market when he/she actively manages the inventory to maximize profits, and that rather the market maker's impact depends on the behavior of the speculators. Numerical simulations show that the model is able to generate outcomes for asset returns and market inventories that are consistent with empirical findings. © 2009.

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http://hdl.handle.net/10453/8289