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

DOI10.1137/16M107030XMaRDI QIDQ4607045zbMATH OpenOpenAlexFDO

Authors Alexander Schied, Elias Strehle, Tao Zhang

Publication date 12 March 2018

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

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

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)

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.

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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
• An FBSDE approach to market impact games with stochastic parameters
• A market impact game under transient price impact
• 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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