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Trading against disorderly liquidation of a large position under asymmetric information and market impact

Author

Listed:
  • Caroline HILLAIRET

    (CREST; Ensae; Université Paris Saclay)

  • Cody HYNDMAN

    (Department of Mathematics and Statistics; Concordia University)

  • Ying JIAO

    (ISFA; Université Lyon 1)

  • Renjie WANG

    (Department of Mathematics and Statistics, Concordia University)

Abstract

We consider trading against a hedge fund or large trader that must liquidate a large position in a risky asset if the market price of the asset crosses a certain threshold. Liquidation occurs in a disorderly manner and negatively impacts the market price of the asset. We consider the perspective of small investors whose trades do not induce market impact and who possess different levels of information about the liquidation trigger mechanism and the market impact. We classify these market participants into three types: fully informed, partially informed and uninformed investors. We consider the portfolio optimization problems and compare the optimal trading and wealth processes for the three classes of investors theoretically and by numerical illustrations.

Suggested Citation

  • Caroline HILLAIRET & Cody HYNDMAN & Ying JIAO & Renjie WANG, 2017. "Trading against disorderly liquidation of a large position under asymmetric information and market impact," Working Papers 2017-76, Center for Research in Economics and Statistics.
    • Handle: RePEc:crs:wpaper:2017-76
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    References listed on IDEAS

    as
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    2. Robert A. Jarrow, 2008. "Market Manipulation, Bubbles, Corners, and Short Squeezes," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 6, pages 105-130, World Scientific Publishing Co. Pte. Ltd..
    3. Amendinger, Jürgen & Imkeller, Peter & Schweizer, Martin, 1998. "Additional logarithmic utility of an insider," Stochastic Processes and their Applications, Elsevier, vol. 75(2), pages 263-286, July.
    4. Frédéric Abergel & Jean-Philippe Bouchaud & Thierry Foucault & Mathieu Rosenbaum & Charles-Albert Lehalle, 2012. "Market microstructure: confronting many viewpoints," Post-Print hal-00872398, HAL.
    5. Amendinger, Jürgen, 2000. "Martingale representation theorems for initially enlarged filtrations," Stochastic Processes and their Applications, Elsevier, vol. 89(1), pages 101-116, September.
    6. Robert J. Elliott & Monique Jeanblanc, 1999. "Incomplete markets with jumps and informed agents," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 50(3), pages 475-492, December.
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    8. Amendinger, Jürgen & Imkeller, Peter & Schweizer, Martin, 1998. "Additional logarithmic utility of an insider," SFB 373 Discussion Papers 1998,25, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
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    More about this item

    Keywords

    Disorderly liquidation; asymmetric information; market impact; portfolio optimization; optimal trading; Monte-Carlo method;
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