Level-k predatory trading

Keisuke Teeple

Journal of Mathematical Economics, 2023, vol. 106, issue C

Abstract: I incorporate the level-k thinking solution concept into a simplified (Brummermeier and Pedersen, 2005) predatory trading model to investigate the possibility of arbitraging arbitrageurs. While naive financial predators prey upon a single distressed investor, higher-level thinkers best respond to this and prey upon fellow predators. For some parameter values, sophisticated predators are able to reason their way to the Nash equilibrium strategy, and prices do not oscillate. As parameter values are perturbed, the system undergoes a bifurcation and predators select strategies from a mean-preserving spread of the Nash equilibrium strategy. In these settings, prices display excess volatility and a single shock can send predators into an oscillatory trading frenzy.

Keywords: Behavioral finance; Level-k models; Front running; Price overshooting (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S030440682300040X
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:mateco:v:106:y:2023:i:c:s030440682300040x

DOI: 10.1016/j.jmateco.2023.102847

Access Statistics for this article

Journal of Mathematical Economics is currently edited by Atsushi (A.) Kajii

More articles in Journal of Mathematical Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().