High-frequency limit of Nash equilibria in a market impact game with transient price impact

DOI10.1137/16M107030XzbMATH Open1407.91234arXiv1509.08281OpenAlexW3101700033MaRDI QIDQ4607045FDOQ4607045

Authors: Alexander Schied, Elias Strehle, Tao Zhang 

Publication date: 12 March 2018

Published in: SIAM Journal on Financial Mathematics (Search for Journal in Brave)

Abstract: We study the high-frequency limits of strategies and costs in a Nash equilibrium for two agents that are competing to minimize liquidation costs in a discrete-time market impact model with exponentially decaying price impact and quadratic transaction costs of size $hetage0$. We show that, for $heta=0$, equilibrium strategies and costs will oscillate indefinitely between two accumulation points. For $heta>0$, however, strategies, costs, and total transaction costs will converge towards limits that are independent of $heta$. We then show that the limiting strategies form a Nash equilibrium for a continuous-time version of the model with $heta$ equal to a certain critical value $het{a}^{\ast }>0$, and that the corresponding expected costs coincide with the high-frequency limits of the discrete-time equilibrium costs. For $hetaeqhet{a}^{\ast }$, however, continuous-time Nash equilibria will typically not exist. Our results permit us to give mathematically rigorous proofs of numerical observations made in Schied and Zhang (2013). In particular, we provide a range of model parameters for which the limiting expected costs of both agents are decreasing functions of $heta$. That is, for sufficiently high trading speed, raising additional transaction costs can reduce the expected costs of all agents.

Full work available at URL: https://arxiv.org/abs/1509.08281

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zbMATH Keywords

Nash equilibriumtransaction coststransient price impacthigh-frequency limitmarket impact game

Mathematics Subject Classification ID

Portfolio theory (91G10) Noncooperative games (91A10) 2-person games (91A05) Dynamic games (91A25) Financial applications of other theories (91G80) Discrete-time games (91A50)

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Cited In (14)

• Transient impact from the Nash equilibrium of a permanent market impact game
• Trading with the crowd
• Price impact equilibrium with transaction costs and TWAP trading
• Nash equilibria for relative investors with (non)linear price impact
• Efficiency of the price formation process in presence of high frequency participants: a mean field game analysis
• Portfolio liquidation games with self‐exciting order flow
• A market impact game under transient price impact
• An FBSDE approach to market impact games with stochastic parameters
• Mean-field liquidation games with market drop-out
• A two-player portfolio tracking game
• Optimal Signal-Adaptive Trading with Temporary and Transient Price Impact
• Price impact in Nash equilibria
• A Stackelberg order execution game
• Instabilities in multi-asset and multi-agent market impact games

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