Predatory Trading: a Game on Volatility and Liquidity
نویسندگان
چکیده
We propose and analyze a continuous time stochastic differential game as a mathematical model for the liquidation of a financial position by a distressed trader facing a predator trading with looser time constraints. Temporary and permanent price impacts are used to model liquidity effects. We construct Nash equilibria by solving a system of coupled degenerate HJB equations and analyze the results numerically. The main thrust of the paper is to exhibit the impact of aggregate noise traders in the market, showing among other things that higher price volatility results in an increase of the predator’s trading activity. We also identify market conditions under which the presence of the predator is beneficial to the distressed trader.
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