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Optimal Trading with Differing Trade Signals

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  • Ryan Donnelly
  • Matthew Lorig

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 affect 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 on 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.

Suggested Citation

  • Ryan Donnelly & Matthew Lorig, 2020. "Optimal Trading with Differing Trade Signals," Papers 2006.13585, arXiv.org, revised Oct 2020.
    • Handle: RePEc:arx:papers:2006.13585
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    File URL: http://arxiv.org/pdf/2006.13585
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    References listed on IDEAS

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    1. Ryan Donnelly & Luhui Gan, 2018. "Optimal Decisions in a Time Priority Queue," Applied Mathematical Finance, Taylor & Francis Journals, vol. 25(2), pages 107-147, March.
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    Cited by:

    1. 'Alvaro Cartea & Fayc{c}al Drissi & Marcello Monga, 2023. "Decentralised Finance and Automated Market Making: Predictable Loss and Optimal Liquidity Provision," Papers 2309.08431, arXiv.org, revised Jun 2024.
    2. Marcello Monga, 2024. "Automated Market Making and Decentralized Finance," Papers 2407.16885, arXiv.org.
    3. Joseph Jerome & Leandro Sanchez-Betancourt & Rahul Savani & Martin Herdegen, 2022. "Model-based gym environments for limit order book trading," Papers 2209.07823, arXiv.org.

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