Trading against disorderly liquidation of a large position under asymmetric information and market impact

DOI10.1051/PROC/201756042MaRDI QIDQ4606384zbMATHOpenAlexFDO

Authors Ying Jiao, Renjie Wang, Caroline Hillairet, Cody Blaine Hyndman

Publication date 7 March 2018

Published in ESAIM: Proceedings and Surveys (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1610.01937

zbMATH Keywords

optimal tradingportfolio optimizationasymmetric informationmarket impactdisorderly liquidation

Mathematics Subject Classification ID

Portfolio theory (91G10) Utility theory (91B16)

Abstract: We consider trading against a hedge fund or large trader that must liquidate a large position in a risky asset if the market price of the asset crosses a certain threshold. Liquidation occurs in a disorderly manner and negatively impacts the market price of the asset. We consider the perspective of small investors whose trades do not induce market impact and who possess different levels of information about the liquidation trigger mechanism and the market impact. We classify these market participants into three types: fully informed, partially informed and uninformed investors. We consider the portfolio optimization problems and compare the optimal trading and wealth processes for the three classes of investors theoretically and by numerical illustrations.

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Cites work

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Cited in

(1)

• Smooth trading with overconfidence and market power

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