A Leland model for delta hedging in central risk books
扩展Leland(1985)模型，研究中央自动做市商如何用市价单和限价单实现Delta对冲，发现限价单最优暴露由逆向选择、买卖价差和波动率决定，并展示了简约模型在市场微观结构中的优势。
Abstract Using a tractable extension of the model of Leland (1985), we study how a delta‐hedging strategy can realistically be implemented using market and limit orders in a centralized, automated market‐making desk that integrates trading and liquidity provision for both options and their underlyings. In the continuous‐time limit, the optimal limit‐order exposure can be computed explicitly by a pointwise maximization. It is determined by the relative magnitudes of adverse selection, bid–ask spreads, and volatilities. The corresponding option price—from which the option can be replicated using market and limit orders—is characterized via a nonlinear PDE. Our results highlight the benefit of tactical liquidity provision for contrarian trading strategies, even for a trading desk that is not a competitive market maker. More generally, the paper also showcases how reduced‐form models are competitive with “brute force” numerical approaches to market microstructure. Both the estimation of microstructure parameters and the simulation of the optimal trading strategy are made concrete and reconciled with real‐life high frequency data.