Rational Quantitative Trading in Efficient Markets
50 Pages Posted: 21 Dec 2009 Last revised: 14 Oct 2019
Date Written: August 25, 2019
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: Suggested Citation