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. Our results demonstrate that accounting for information signaling and the presence of strategic adversaries can greatly reduce execution costs.
Moallemi, Ciamac, Beomsoo Park, and Benjamin Van Roy. "Strategic execution in the presence of an uninformed arbitrageur." Journal of Financial Markets 15, no. 4 (November 2012): 361-391.
Each author name for a Columbia Business School faculty member is linked to a faculty research page, which lists additional publications by that faculty member.
Each topic is linked to an index of publications on that topic.