Strategic execution in the presence of an uninformed arbitrageur |
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Authors: | Ciamac C Moallemi Beomsoo Park Benjamin Van Roy |
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Institution: | 1. Graduate School of Business, Columbia University, 3022 Broadway, Uris 416, New York, NY 10027, United States;2. Department of Electrical Engineering, Stanford University, Stanford, CA 94305, United States;3. Stanford University, Stanford, CA 94305, United States |
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Abstract: | 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. |
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