Relative Arbitrage Opportunities in an Extended Mean Field System

Nicole Tianjiao Yang and Tomoyuki Ichiba

Papers from arXiv.org

Abstract: This paper studies relative arbitrage opportunities in a market with competitive investors through stochastic differential games in the limit as the number of players tends to infinity. With common noises introduced by the stock capitalization processes, we establish a conditional McKean-Vlasov system to study the market dynamics coupled to the expected trading volume of investors. We show that optimal arbitrage can be characterized as a solution of a Cauchy PDE constructed by the volatility terms in the market model. The structure of the market dynamics can be relaxed, and we provide a theoretical framework to study a general mean-field system, where the interaction is characterized by a joint distribution of wealth and strategies. In this setting, the optimal relative arbitrage constitutes the strong equilibrium of an extended mean-field game. We provide conditions for the existence and uniqueness of the mean-field equilibrium. We further prove the propagation of chaos result for the finite-player game counterpart, and demonstrate that the Nash equilibrium converges to the mean field equilibrium when the population grows to infinity.

Date: 2023-11, Revised 2025-11
New Economics Papers: this item is included in nep-gth
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