Rational Quantitative Trading in Efficient Markets

67 Pages Posted: 21 Dec 2009 Last revised: 24 Oct 2020

See all articles by Stefano Rossi

Stefano Rossi

Bocconi University; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Katrin Tinn

McGill University - Desautels Faculty of Management; Centre for Economic Policy Research (CEPR)

Date Written: August 25, 2019

Abstract

We present a model where quantitative trading − trading strategies based on the quantitative analysis of prices, volumes, and other asset and market characteristics − is systematically profitable for sophisticated traders whose only source of private information is knowing better than other market participants how many fundamental traders, i.e., traders informed about fundamentals, are active in the market. In equilibrium, the direction of optimal quantitative trading depends on the number of fundamental traders and often switches sign when order flow increases: with few fundamental traders, optimal quantitative trading is trend-following (re. contrarian) after small (re. large) price changes; with many fundamental traders, the opposite holds: it is contrarian (re. trend-following) after small (re. large) price changes.

Keywords: Quantitative trading, Uncertainty about informed trading, Market efficiency, Learning

JEL Classification: G12, G14, D82, D84

Suggested Citation

Rossi, Stefano and Tinn, Katrin, Rational Quantitative Trading in Efficient Markets (August 25, 2019). Journal of Economic Theory, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1525403 or http://dx.doi.org/10.2139/ssrn.1525403

Stefano Rossi

Bocconi University ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Katrin Tinn (Contact Author)

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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