Optimal Trading with Differing Trade Signals

28 Pages Posted: 16 Jul 2020 Last revised: 12 Oct 2020

See all articles by Ryan Francis Donnelly

Ryan Francis Donnelly

King's College London

Matthew Lorig

University of Washington - Applied Mathematics

Date Written: June 24, 2020

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.

Keywords: algorithmic trading, mean-field games

JEL Classification: C61, C73, G11

Suggested Citation

Donnelly, Ryan Francis and Lorig, Matthew, Optimal Trading with Differing Trade Signals (June 24, 2020). Available at SSRN: https://ssrn.com/abstract=3634629 or http://dx.doi.org/10.2139/ssrn.3634629

Ryan Francis Donnelly (Contact Author)

King's College London ( email )

Strand
London, England WC2R 2LS
United Kingdom

Matthew Lorig

University of Washington - Applied Mathematics ( email )

Seattle, WA
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
50
Abstract Views
504
PlumX Metrics