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Broker-Trader Partial Information Nash Equilibria

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  • Xuchen Wu
  • Sebastian Jaimungal

Abstract

We study partial information Nash equilibrium between a broker and an informed trader. In this model, the informed trader, who possesses knowledge of a trading signal, trades multiple assets with the broker in a dealer market. Simultaneously, the broker trades these assets in a lit exchange where their actions impact the asset prices. The broker, however, only observes aggregate prices and cannot distinguish between underlying trends and volatility. Both the broker and the informed trader aim to maximize their penalized expected wealth. Using convex analysis, we characterize the Nash equilibrium and demonstrate its existence and uniqueness. Furthermore, we establish that this equilibrium corresponds to the solution of a nonstandard system of forward-backward stochastic differential equations.

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  • Xuchen Wu & Sebastian Jaimungal, 2024. "Broker-Trader Partial Information Nash Equilibria," Papers 2412.17712, arXiv.org.
    • Handle: RePEc:arx:papers:2412.17712
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    File URL: http://arxiv.org/pdf/2412.17712
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