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This study investigates the effect of a jump risk on options’ bid–ask implied volatility (IMV) spreads. We introduce theoretical models assuming market makers encounter a Bernoulli‐type jump atnd optimize the mean‐variance utility by choosing the optimal hedging delta and price. We find, at a low jump arrival rate, the Black–Scholes–Merton dynamic hedging for diffusion volatility outperforms static...
Market makers in some financial markets often make offsetting trades and have significant market power. We develop a market making model that captures these market features as well as other important characteristics such as information asymmetry and inventory risk. In contrast to the existing literature, a market maker in our model can optimally shift some trades with some investors to other investors...
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