Automated Market Making and Loss-Versus-Rebalancing

Autor:	Milionis, Jason, Moallemi, Ciamac C., Roughgarden, Tim, Zhang, Anthony Lee
Rok vydání:	2022
Předmět:	Quantitative Finance - Mathematical Finance Mathematics - Optimization and Control Quantitative Finance - Portfolio Management Quantitative Finance - Pricing of Securities Quantitative Finance - Trading and Market Microstructure
Druh dokumentu:	Working Paper
Popis:	We consider the market microstructure of automated market makers (AMMs) from the perspective of liquidity providers (LPs). Our central contribution is a ``Black-Scholes formula for AMMs''. We identify the main adverse selection cost incurred by LPs, which we call ``loss-versus-rebalancing'' (LVR, pronounced ``lever''). LVR captures costs incurred by AMM LPs due to stale prices that are picked off by better informed arbitrageurs. We derive closed-form expressions for LVR applicable to all automated market makers. Our model is quantitatively realistic, matching actual LP returns empirically, and shows how CFMM protocols can be redesigned to reduce or eliminate LVR. Comment: 63 pages, 7 figures
Databáze:	arXiv
Externí odkaz:	http://arxiv.org/abs/2208.06046 Zobrazit plný text záznamu View this record from Arxiv