Asset pricing with heterogeneous beliefs and illiquidity

Muhle‐Karbe, Johannes; Nutz, Marcel; Tan, Xiaowei

doi:10.1111/mafi.12268

Cited by 10 publications

(5 citation statements)

References 66 publications

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“…More recently, in Muhle-Karbe et al, 22 a continuous time model is presented for the equilibrium price of an asset traded between N agents with heterogeneous beliefs about the state process underlying the true payoff. Fruth et al 23 studied optimal trade execution strategies in the presence of stochastic changes in the depth of LOB.…”

Section: Related Workmentioning

confidence: 99%

Reinforcement-learning-based optimal trading in a simulated futures market with heterogeneous agents

Aydın

2021

SIMULATION

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This paper simulates a futures market with multiple agents and sequential auctions, where agents receive long-lived heterogeneous signals on the true value of an asset and with a known deadline. The evolution of the amount of differential information and its impact on the distribution of overall gains and the pace of truth discovery is examined for various depth levels of the limit order book (LOB). The paper also formulates a dynamic programming model for the problem and presents an associated reinforcement learning (RL) algorithm for finding optimal strategy in exploiting informational disparity. This is done from the perspective of an agent whose information is superior to the collective information of the rest of the market. Finally, a numerical analysis is presented based on a futures market example to validate the proposed methodology for finding the optimal strategy. We find evidence in favor of a waiting strategy where agent does not reveal her signal until the last auction before the deadline. This result may help bring more insight into the micro-structural dynamics that work against market efficiency.

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Section: Related Workmentioning

confidence: 99%

Reinforcement-learning-based optimal trading in a simulated futures market with heterogeneous agents

Aydın

2021

SIMULATION

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“…A matrix version of the variation of constants formula in turn allows to derive bounds on the unique local solution of this equation. This in turn finally 7 If one penalizes squared inventories rather than the corresponding fluctuations (which depend on the endogenous volatility), then the FBSDE system becomes linear and can be analyzed in very general settings, in particular, for arbitrary numbers of agents, compare [6,33].…”

Section: Frictional Optimization and Equilibriummentioning

confidence: 99%

An Equilibrium Model for the Cross-Section of Liquidity Premia

Muhle‐Karbe

Shi

Yang

2020

Preprint

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We study a risk-sharing economy where an arbitrary number of heterogenous agents trades an arbitrary number of risky assets subject to quadratic transaction costs. For linear state dynamics, the forward-backward stochastic differential equations characterizing equilibrium asset prices and trading strategies in this context reduce to a system of matrix-valued Riccati equations. We prove the existence of a unique global solution and provide explicit asymptotic expansions that allow us to approximate the corresponding equilibrium for small transaction costs. These tractable approximation formulas make it feasible to calibrate the model to time series of prices and trading volume, and to study the cross-section of liquidity premia earned by assets with higher and lower trading costs. This is illustrated by an empirical case study.This paper is dedicated to the memory of our dear colleague Mark H.A. Davis, whose seminal works [15,16] ushered in the mathematical analysis of models with transaction costs.

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“…Recently, there have been approaches to explain bubbles through the concept of holding costs and liquidity costs (see Muhle-Karbe et al [2020]). This research shows that the costs influence future trading opportunities by adding a penalization in terms of the expected return.…”

Section: Introductionmentioning

confidence: 99%

Conditions for bubbles to arise under heterogeneous beliefs

Lee¹,

Park²

2020

Preprint

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This paper studies the equilibrium price of a continuous time asset traded in a market with heterogeneous investors. We consider a positive mean reverting asset and two groups of investors who have different beliefs on the speed of mean reversion and the mean level. We provide an equivalent condition for bubbles to exist and show that price bubbles may not form even though there are heterogeneous beliefs. This condition is directly related to the drift term of the asset. In addition, we characterize the minimal equilibrium price as a unique C 2 solution of a differential equation and express it using confluent hypergeometric functions.

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Asset pricing with heterogeneous beliefs and illiquidity

Cited by 10 publications

References 66 publications

Reinforcement-learning-based optimal trading in a simulated futures market with heterogeneous agents

Reinforcement-learning-based optimal trading in a simulated futures market with heterogeneous agents

An Equilibrium Model for the Cross-Section of Liquidity Premia

Conditions for bubbles to arise under heterogeneous beliefs

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