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Charles-Albert Lehalle () and Charafeddine Mouzouni ()
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Charles-Albert Lehalle: Chevreux Research Department - Chevreux SA
Charafeddine Mouzouni: PSPM - Probabilités, statistique, physique mathématique - ICJ - Institut Camille Jordan [Villeurbanne] - CNRS - Centre National de la Recherche Scientifique - UJM - Université Jean Monnet [Saint-Étienne] - ECL - École Centrale de Lyon - Université de Lyon - INSA Lyon - Institut National des Sciences Appliquées de Lyon - Université de Lyon - INSA - Institut National des Sciences Appliquées - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon

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Abstract: This paper goes beyond the optimal trading Mean Field Game model introduced by Pierre Cardaliaguet and Charles-Albert Lehalle in [Cardaliaguet, P. and Lehalle, C.-A., Mean field game of controls and an application to trade crowding, Mathematics and Financial Economics (2018)]. It starts by extending it to portfolios of correlated instruments. This leads to several original contributions: first that hedging strategies naturally stem from optimal liquidation schemes on portfolios. Second we show the influence of trading flows on naive estimates of intraday volatility and correlations. Focussing on this important relation, we exhibit a closed form formula expressing standard estimates of correlations as a function of the underlying correlations and the initial imbalance of large orders, via the optimal flows of our mean field game between traders. To support our theoretical findings, we use a real dataset of 176 US stocks from January to December 2014 sampled every 5 minutes to analyze the influence of the daily flows on the observed correlations. Finally, we propose a toy model based approach to calibrate our MFG model on data.

New Economics Papers: this item is included in nep-gth
Date: 2019-02-01
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