Optimal Trading with Differing Trade Signals

Ryan Donnelly and Matthew Lorig

Applied Mathematical Finance, 2020, vol. 27, issue 4, 317-344

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 affects 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 of 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.

Date: 2020
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DOI: 10.1080/1350486X.2020.1847672

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