2008/01/19 by Ciamac C. Moallemi, Moallemi, Ciamac C., Beomsoo Park +3
Economics, Econometrics and Finance · Mathematics · #Complex Systems and Time Series Analysis #Economic theories and models #FOS: Mathematics #Financial Markets and Investment Strategies #Optimization and Control (math.OC) #Probability (math.PR) #math.OC #math.PR
paper · pdf · doi:10.48550/arxiv.0801.3001
openalex publication_date 2008/01/19 · arxiv created 2009/03/11 · arxiv updated 2009/12/01 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28
We consider a trader who aims to liquidate a large position in the presence of an arbitrageur who hopes to profit from the trader's activity. The arbitrageur is uncertain about the trader's position and learns from observed price fluctuations. This is a dynamic game with asymmetric information. We present an algorithm for computing perfect Bayesian equilibrium behavior and conduct numerical experiments. Our results demonstrate that the trader's strategy differs significantly from one that would be optimal in the absence of the arbitrageur. In particular, the trader must balance the conflicting desires of minimizing price impact and minimizing information that is signaled through trading. Accounting for information signaling and the presence of strategic adversaries can greatly reduce execution costs.