medium · Market Microstructure
In the Avellaneda-Stoikov model, how does an increase in the market maker's risk aversion parameter γ affect the optimal bid-ask spread?
- The spread widens to compensate for the utility loss of price risk.
- The spread remains unchanged but the midpoint shifts more aggressively.
- The spread becomes zero as the market maker exits the market.
- The spread narrows to capture more order flow.
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