Seminar 217, Risk Management: A two-player price impact game

Seminar: Risk Seminar | January 28 | 11 a.m.-12:30 p.m. | 1011 Evans Hall

 Moritz Voss, UCSB

 Consortium for Data Analytics in Risk

ABSTRACT: We study the competition of two strategic agents for liquidity in
the benchmark portfolio tracking setup of Bank, Soner, Voss (2017),
both facing common aggregated temporary and permanent price impact
à la Almgren and Chriss (2001). The resulting stochastic linear quadratic
differential game with terminal state constraints allows for an
explicitly available open-loop Nash equilibrium in feedback form.
Our results reveal how the equilibrium strategies of the two
players take into account the other agent's trading targets: either
in an exploitative intent or by providing liquidity to the
competitor, depending on the ratio between temporary and permanent
price impact. As a consequence, different behavioral patterns can
emerge as optimal in equilibrium. These insights complement existing
studies in the literature on predatory trading models examined in
the context of optimal portfolio liquidation problems.

Preprint available on arXiv: arXiv:1911.05122.