Liquidity supply by a risk-averse market maker

Market makers bear enormous uncertainty of the values of their portfolios and their attitude towards risk should not be completely ignored. In this article, we analyse a quote-driven market of a risky financial asset, where a risk-averse market maker supplies liquidity to traders. We characterise the equilibrium of the market for trading based on liquidity demand/diverse opinions on the value of the risky asset or based on information asymmetry. We find that risk aversion of the market maker is likely to increase the non-participation range of traders and the bid-ask spread.