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Learning about latent dynamic trading demand $$^*$$ ∗

Author

Listed:
  • Xiao Chen

    (Rutgers University)

  • Jin Hyuk Choi

    (Ulsan National Institute of Science and Technology (UNIST))

  • Kasper Larsen

    (Rutgers University)

  • Duane J. Seppi

    (Carnegie Mellon University)

Abstract

We present an equilibrium model of dynamic trading, learning, and pricing by strategic investors with trading targets and price impact. Since trading targets are private, investors filter the child order flow dynamically over time to estimate the latent underlying parent trading demand imbalance and to forecast its impact on subsequent price-pressure dynamics. We prove existence of an equilibrium and solve for equilibrium trading strategies and prices as the solution to a system of coupled ODEs. Trading strategies are combinations of trading towards investor targets, liquidity provision for other investors’ demands, and speculation based on learning about latent underlying trading-demand imbalances.

Suggested Citation

  • Xiao Chen & Jin Hyuk Choi & Kasper Larsen & Duane J. Seppi, 2022. "Learning about latent dynamic trading demand $$^*$$ ∗," Mathematics and Financial Economics, Springer, volume 16, number 1, March.
  • Handle: RePEc:spr:mathfi:v:16:y:2022:i:4:d:10.1007_s11579-022-00317-5
    DOI: 10.1007/s11579-022-00317-5
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    References listed on IDEAS

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    1. Puru Gupta & Saul D. Jacka, 2023. "Portfolio Choice In Dynamic Thin Markets: Merton Meets Cournot," Papers 2309.16047, arXiv.org.

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