Date of Original Version

8-2015

Type

Article

Rights Management

© Institute of Mathematical Statistics, 2015

Abstract or Description

We develop from basic economic principles a continuous-time model for a large investor who trades with a finite number of market makers at their utility indifference prices. In this model, the market makers compete with their quotes for the investor’s orders and trade among themselves to attain Pareto optimal allocations. We first consider the case of simple strategies and then, in analogy to the construction of stochastic integrals, investigate the transition to general continuous dynamics. As a result, we show that the model’s evolution can be described by a nonlinear stochastic differential equation for the market makers’ expected utilities

DOI

10.1214/14-AAP1059

Included in

Mathematics Commons

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Published In

Annals of Applied Probability, 25, 5, 2708-2742.