The effect of inventory on asset prices

Abstract

In this paper, we extend the existing asset pricing model of the market maker mechanism to consider the market maker clearing the market price through inventory. Using the stability and branching theory of discrete dynamical systems, we discuss the existence of the steady state and the influence of the change with the adjustment rate of the market maker’s inventory on the stability region of the model. Through numerical simulation, we obtain the result that the faster or slower the adjustment of the market maker’s inventory, the more unstable the market price is. We establish a linear regression model and analyze it by empirical tests using the stock data of Lanqi Technology, which shows that there is a positive correlation between the market maker’s inventory and price; the increase of the market maker’s inventory will cause the price to increase. By analyzing the theoretical model data through the TVP-VAR model, it can also be obtained that there is a positive correlation between the price and the market maker’s inventory.