Equilibrium Price Formation with a Major Player and its Mean Field Limit

Abstract

In this article, we consider the problem of equilibrium price formation in an incomplete securities market consisting of one major financial firm and a large number of minor firms. They carry out continuous trading via the securities exchange to minimize their cost while facing idiosyncratic and common noises as well as stochastic order flows from their individual clients. The equilibrium price process that balances demand and supply of the securities, including the functional form of the price impact for the major firm, is derived endogenously both in the market of finite population size and in the corresponding mean field limit.

Keywords: equilibrium price formation, market clearing, mean field game, major agent, controlled-FBSDEs

JEL Classification: G12, C73,C62