Trading against disorderly liquidation of a large position under asymmetric information and market impact

Caroline Hillairet (), Cody Hyndman (), Ying Jiao () and Renjie Wang ()
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Caroline Hillairet: CREST; Ensae; Université Paris Saclay
Cody Hyndman: Department of Mathematics and Statistics; Concordia University
Ying Jiao: ISFA; Université Lyon 1
Renjie Wang: Department of Mathematics and Statistics, Concordia University

No 2017-76, Working Papers from Center for Research in Economics and Statistics

Abstract: We consider trading against a hedge fund or large trader that must liquidate a large position in a risky asset if the market price of the asset crosses a certain threshold. Liquidation occurs in a disorderly manner and negatively impacts the market price of the asset. We consider the perspective of small investors whose trades do not induce market impact and who possess different levels of information about the liquidation trigger mechanism and the market impact. We classify these market participants into three types: fully informed, partially informed and uninformed investors. We consider the portfolio optimization problems and compare the optimal trading and wealth processes for the three classes of investors theoretically and by numerical illustrations.

Keywords: Disorderly liquidation; asymmetric information; market impact; portfolio optimization; optimal trading; Monte-Carlo method (search for similar items in EconPapers)
Pages: 33 pages
Date: 2017-10-06
New Economics Papers: this item is included in nep-mst
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