Optimal trading with differing trade signals

DOI10.1080/1350486X.2020.1847672zbMATH Open1466.91309arXiv2006.13585OpenAlexW3107009690MaRDI QIDQ4994352FDOQ4994352

Authors: Ryan Donnelly, Matthew Lorig 

Publication date: 17 June 2021

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

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.

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

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zbMATH Keywords

price impactmean-field gamesalgorithmic trading

Mathematics Subject Classification ID

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

Cites Work

• Continuous Auctions and Insider Trading
• Incorporating order-flow into optimal execution
• Hedging nontradable risks with transaction costs and price impact
• A closed-form execution strategy to target volume weighted average price
• Mean-Field Game Strategies for Optimal Execution
• Mean-field games with differing beliefs for algorithmic trading
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Cited In (9)

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

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