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.

Bio
Ioanid Rosu received two Ph.D.'s, in mathematics and in financial economics, both from MIT. Between 2004 and 2010 he served as Assistant Professor of Finance at the University of Chicago, Booth School of Business. Since 2010, he is Associate Professor of Finance at HEC Paris. His research focuses on the liquidity of financial markets and its effect on asset prices and investor decisions. He has written several papers on High Frequency Trading and its effect on market quality. He is also interested in mergers and acquisitions, option pricing, and earnings management. His work has appeared in the Journal of Finance, Review of Financial Studies, and elsewhere. He is an Associate Editor of the Journal of Financial Markets.

Zoom:

https://us02web.zoom.us/j/81131944721?pwd=YkhpMGtCbnQwS0VzNFEvUlNGUk93Zz09

ID：811 3194 4721

PW：345202