Rational Quantitative Trading in Efficient Markets

50 Pages Posted: 21 Dec 2009 Last revised: 14 Oct 2019

See all articles by Stefano Rossi

Stefano Rossi

Bocconi University; Krannert School of Management; Centre for Economic Policy Research (CEPR)

Katrin Tinn

Imperial College London - Accounting, Finance, and Macroeconomics; McGill University - Desautels Faculty of Management; Imperial College Business School

Date Written: August 25, 2019

Abstract

We present a model where quantitative trading, i.e., trading strategies based on the quantitative analysis of publicly observable variables such as price, volume, and other asset and market characteristics, is systematically profitable for financial institutions. Quantitative trading has been argued to be inconsistent with market efficiency. In contrast, we show that quantitative trading is the equilibrium strategy for traders whose only source of private information is knowing better how many informed traders are active in the market. We prove that optimal quantitative strategies are typically non-monotonic functions of order flows, e.g., trend-following (re. contrarian) 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). 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

Krannert School of Management ( email )

West Lafayette, IN 47907-1310
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Katrin Tinn (Contact Author)

Imperial College London - Accounting, Finance, and Macroeconomics ( email )

South Kensington campus
London SW7 2AZ
United Kingdom

McGill University - Desautels Faculty of Management ( email )

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

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

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