TY - GEN

T1 - A utility framework for bounded-loss market makers

AU - Chen, Yiling

AU - Pennock, David M.

PY - 2007

Y1 - 2007

N2 - 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.

AB - 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.

UR - http://www.scopus.com/inward/record.url?scp=80053191054&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=80053191054&partnerID=8YFLogxK

M3 - Conference contribution

AN - SCOPUS:80053191054

SN - 0974903930

SN - 9780974903934

T3 - Proceedings of the 23rd Conference on Uncertainty in Artificial Intelligence, UAI 2007

SP - 49

EP - 56

BT - Proceedings of the 23rd Conference on Uncertainty in Artificial Intelligence, UAI 2007

T2 - 23rd Conference on Uncertainty in Artificial Intelligence, UAI 2007

Y2 - 19 July 2007 through 22 July 2007

ER -