Inventory-skewed reservation price
You are making a market with the fair mid at $100. You are already long 10 units of inventory and want to quote around a reservation price that leans your quotes to shed risk. Your inventory penalty is , where is your signed inventory, is your risk aversion, is the per-period variance, and is the horizon. At what price should you center your quotes (in dollars)?
Show hints (2)+
- Long inventory should push your quote center below the fair mid - decide the sign first.
- Reservation price .
Answer
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