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Trading with the crowd

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  • Eyal Neuman
  • Moritz Voß

Abstract

We formulate and solve a multi‐player stochastic differential game between financial agents who seek to cost‐efficiently liquidate their position in a risky asset in the presence of jointly aggregated transient price impact, along with taking into account a common general price predicting signal. The unique Nash‐equilibrium strategies reveal how each agent's liquidation policy adjusts the predictive trading signal to the aggregated transient price impact induced by all other agents. This unfolds a quantitative relation between trading signals and the order flow in crowded markets. We also formulate and solve the corresponding mean field game in the limit of infinitely many agents. We prove that the equilibrium trading speed and the value function of an agent in the finite N‐player game converges to the corresponding trading speed and value function in the mean field game at rate O(N−2)$O(N^{-2})$. In addition, we prove that the mean field optimal strategy provides an approximate Nash‐equilibrium for the finite‐player game.

Suggested Citation

  • Eyal Neuman & Moritz Voß, 2023. "Trading with the crowd," Mathematical Finance, Wiley Blackwell, vol. 33(3), pages 548-617, July.
    • Handle: RePEc:bla:mathfi:v:33:y:2023:i:3:p:548-617
    DOI: 10.1111/mafi.12390
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    References listed on IDEAS

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    5. Charles-Albert Lehalle & Eyal Neuman, 2019. "Incorporating signals into optimal trading," Finance and Stochastics, Springer, vol. 23(2), pages 275-311, April.
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    10. Eyal Neuman & Moritz Vo{ss}, 2020. "Optimal Signal-Adaptive Trading with Temporary and Transient Price Impact," Papers 2002.09549, arXiv.org, revised Jan 2022.
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    Cited by:

    1. Eduardo Abi Jaber & Eyal Neuman & Moritz Voss, 2023. "Equilibrium in Functional Stochastic Games with Mean-Field Interaction," Working Papers hal-04119787, HAL.
    2. Guanxing Fu & Paul P. Hager & Ulrich Horst, 2024. "A Mean-Field Game of Market Entry: Portfolio Liquidation with Trading Constraints," Papers 2403.10441, arXiv.org.

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