Trading Strategy with Stochastic Volatility in a Limit Order Book Market

In this paper, we employ the Heston stochastic volatility model to describe the stock's volatility and apply the model to derive and analyze the optimal trading strategies for dealers in a security market. We also extend our study to option market making for options written on stocks in the presence of stochastic volatility. Mathematically, the problem is formulated as a stochastic optimal control problem and the controlled state process is the dealer's mark-to-market wealth. Dealers in the secu...