Stoikov for half-dummies
Some posts ago, we gave intuition for the seminal paper on market-making inventory management by Avellaneda & Stoikov.
Rather than mathematics, we gave intuition.
This time, we give mathematics. We go through the derivation (working) step-by-step, so that no more than college level mathematics is necessary to understand the model.
In many situations (like mine), either the trader is capable of the engineering, and not the mathematics - or vice versa. The market notes hope to bring you (and me) closer to ‘polymath’ (I am laughing as I say this already).
The final form is slightly different (by some scalar factor), I think the paper made a small mistake. Conclusions are no different, same intuition applies.
I decided to make the relevant pages available for all to read. Pages 885-891 are attached:
Here will be the full, updated notes! 916 pages.