Optimal trading with differing trade signals

DOI10.1080/1350486X.2020.1847672MaRDI QIDQ4994352zbMATH OpenOpenAlexFDO

Authors Ryan Donnelly, Matthew Lorig

Publication date 17 June 2021

Published in Applied Mathematical Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/2006.13585

zbMATH Keywords

algorithmic tradingmean-field gamesprice impact

Mathematics Subject Classification ID

Mean field games (aspects of game theory) (91A16) Applications of game theory (91A80) Portfolio theory (91G10) Financial markets (91G15)

Abstract: We consider the problem of maximizing portfolio value when an agent has a subjective view on asset value which differs from the traded market price. The agent's trades will have a price impact which affect the price at which the asset is traded. In addition to the agent's trades affecting the market price, the agent may change his view on the asset's value if its difference from the market price persists. We also consider a situation of several agents interacting and trading simultaneously when they have a subjective view on the asset value. Two cases of the subjective views of agents are considered, one in which they all share the same information, and one in which they all have an individual signal correlated with price innovations. To study the large agent problem we take a mean-field game approach which remains tractable. After classifying the mean-field equilibrium we compute the cross-sectional distribution of agents' inventories and the dependence of price distribution on the amount of shared information among the agents.

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Cites work

• A closed-form execution strategy to target volume weighted average price
• Continuous Auctions and Insider Trading
• Hedging nontradable risks with transaction costs and price impact
• Incorporating order-flow into optimal execution
• Mean-Field Game Strategies for Optimal Execution
• Mean-field games with differing beliefs for algorithmic trading
• Optimal decisions in a time priority queue

Cited in

(11)

• Liquidity generated by heterogeneous beliefs and costly estimations
• Information pooling game in multi-portfolio optimization
• Optimal Signal-Adaptive Trading with Temporary and Transient Price Impact
• Optimal trading with signals and stochastic price impact
• Mean-field games with differing beliefs for algorithmic trading
• Optimal Execution: A Review
• Trading with the crowd
• Optimal trading and competition with information in the price impact model
• Decentralized finance and automated market making: predictable loss and optimal liquidity provision
• Liquidity competition between brokers and an informed trader
• Trade Execution Games in a Markovian Environment

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