Partial Observability

Partial observability is the failure mode in which the agent cannot observe the full state of the market — latent variables such as order flow, sentiment, hidden liquidity and microstructure noise are unmeasured — so the Markov property fails on the observed state and the problem is properly a Partially Observable MDP (POMDP). It appears in this vault because Lalor & Swishchuk 2025 title their paper “Non-Markov Market-Making”: real limit-order-book dynamics show jumps and memory, so the memoryless MDP state is a convenient approximation rather than a faithful description, and any policy built on it inherits that gap.

Connections

• Markov Decision Process Trading Model — suffers_overfitting_risk, source: https://arxiv.org/html/2410.14504v2