Mathematical Market Microstructure: An Optimized Approach
This course is an introduction to mathematical theory of market microstructure, with key applications in solving optimal execution problems with inventory management. We will start from discussions of market design, global market structure, algorithmic trading and market making practices. We will then present traditional market microstructure theory in the context of dealer inventory management and information-based quoting and pricing. Latest literature about realized volatility calculations using high-frequency data will be reviewed. The subject of order book dynamics research with applications to market impact modeling will be discussed as well. Continuous-time stochastic control theory with applications to execution algorithm development and market making strategy design will be reviewed and discussed. The course also will go through some latest developments in algorithm and strategy development using machine learning techniques. The main goal of this course is to provide a clear discussion on key mathematical treatments and their practical applications of market microstructure problems related to price discovery and utility optimization for certain transaction processes with non-trivial transaction cost present.
This is a five-week course taught in the second half of the quarter.