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Start Over Author "Cartea, Álvaro" Publisher elsevier bv
56 results on '"Cartea, Álvaro"'

11. Decentralised Finance and Automated Market Making: Execution and Speculation

Author

Cartea, Álvaro, Drissi, Fayçal, and Monga, Marcello

Subjects
FOS: Economics and business, History, Quantitative Finance - Trading and Market Microstructure, Polymers and Plastics, Quantitative Finance - Mathematical Finance, Business and International Management, Mathematical Finance (q-fin.MF), Industrial and Manufacturing Engineering, Trading and Market Microstructure (q-fin.TR)
Abstract

Automated market makers (AMMs) are a new prototype of trading venues which are revolutionising the way market participants interact. At present, the majority of AMMs are constant function market makers (CFMMs) where a deterministic trading function determines how markets are cleared. A distinctive characteristic of CFMMs is that execution costs are given by a closed-form function of price, liquidity, and transaction size. This gives rise to a new class of trading problems. We focus on constant product market makers and show how to optimally trade a large position in an asset and how to execute statistical arbitrages based on market signals. We employ stochastic optimal control tools to devise two strategies. One strategy is based on the dynamics of prices in competing venues and assumes constant liquidity in the AMM. The other strategy assumes that AMM prices are efficient and liquidity is stochastic. We use Uniswap v3 data to study price, liquidity, and trading cost dynamics, and to motivate the models. Finally, we perform consecutive runs of in-sample estimation of model parameters and out-of-sample liquidation and arbitrage strategies to showcase the performance of the strategies., Paper in [SSRN 4144743]

Published
2022

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