Optimal Market-Making with Risk Aversion
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Date: 04-02-2009
Start Time:
1:00pm
End Time: 2:00pm
Speaker: David Simchi-Levi, Massachusetts Institute of Technology
Location: Uris 330
ABSTRACT
Market-makers have the obligation to trade fixed amounts of securities at quoted bid or ask prices, and their inventories are exposed to the potential loss when the market price moves in an undesirable direction. One approach to reduce the risk associated with price uncertainty is to adjust the inventory at the price of losing potential spread gain. For a single-security model, we show that a threshold inventory control policy is optimal with respect to an exponential utility criterion, and more general results are obtained for mean-variance analysis. The mean-variance analysis for a multiple-security model suggests that there exists a connected no-trade region and that the optimal strategy can be obtained from this region.
BIO
David Simchi-Levi is a professor of Engineering Systems at Massachusetts Institute of Technology. He was the founder of LogicTools now part of ILOG, an IBM company, where he serves as a Chief Scientist. His research currently focuses on developing and implementing robust and efficient techniques for manufacturing and supply chains. He has published widely in professional journals on both practical and theoretical aspects of supply chain management. He has been the principal investigator for more than seven million dollars in funded academic research. He is the Editor-in-Chief of Operations Research, the flagship journal of INFORMS, the former Editor-in-Chief of Naval Research Logistics and a member of the board for several scientific journals.
Professor Simchi-Levi is the co-author (with Julien Bramel) of The Logic of Logistics, published by Springer in 1997; 2nd Edition (with X. Chen) appeared in October 2004. His book, Designing and Managing the Supply Chain (with P. Kaminsky and E. Simchi-Levi) was published by McGraw-Hill in August 1999, 2nd Edition appeared in October 2002 and 3rd Edition in July 2007. The book received the Book-of-the-year award and the Outstanding IIE Publication award given in 2000 by the Institute of Industrial Engineers, and the Outstanding First Edition of the Year award given in 2000 by McGraw-Hill. The book was also selected by Business 2.0, December 2001 issue, as the best source for slashing time and cost and increasing productivity in the supply chain. The book has been translated to Chinese, Japanese, Korean and Portuguese. His third book, Managing the Supply Chain (with P. Kaminsky and E. Simchi-Levi) was published by McGraw-Hill in December 2003.