A utility framework for bounded-loss market makers

Yiling Chen, David M. Pennock

Research output: Chapter in Book/Report/Conference proceedingConference contribution

85 Scopus citations

Abstract

We introduce a class of utility-based market makers that always accept orders at their risk-neutral prices. We derive necessary and sufficient conditions for such market makers to have bounded loss. We prove that hyperbolic absolute risk aversion utility market makers are equivalent to weighted pseu-dospherical scoring rule market makers. In particular, Hanson's logarithmic scoring rule market maker corresponds to a negative exponential utility market maker in our framework. We describe a third equivalent formulation based on maintaining a cost function that seems most natural for implementation purposes, and we illustrate how to translate among the three equivalent formulations. We examine the tradeoff between the market's liquidity and the market maker's worst-case loss. For a fixed bound on worst-case loss, some market makers exhibit greater liquidity near uniform prices and some exhibit greater liquidity near extreme prices, but no market maker can exhibit uniformly greater liquidity in all regimes. For a fixed minimum liquidity level, we give the lower bound of market maker's worst-case loss under some regularity conditions.

Original languageEnglish (US)
Title of host publicationProceedings of the 23rd Conference on Uncertainty in Artificial Intelligence, UAI 2007
Pages49-56
Number of pages8
StatePublished - 2007
Externally publishedYes
Event23rd Conference on Uncertainty in Artificial Intelligence, UAI 2007 - Vancouver, BC, Canada
Duration: Jul 19 2007Jul 22 2007

Publication series

NameProceedings of the 23rd Conference on Uncertainty in Artificial Intelligence, UAI 2007

Conference

Conference23rd Conference on Uncertainty in Artificial Intelligence, UAI 2007
Country/TerritoryCanada
CityVancouver, BC
Period7/19/077/22/07

All Science Journal Classification (ASJC) codes

  • Artificial Intelligence

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