Even when confronted with the same data, agents often disagree on a model of the real-world. Here, we address the question of how interacting heterogenous agents, who disagree on what model the real-world follows, optimize their trading actions. The market has latent factors that drive prices, and agents account for the permanent impact they have on prices. This leads to a large stochastic game, where each agents' performance criteria is computed under a different probability measure. We analyse the mean-field game (MFG) limit of the stochastic game and show that the Nash equilibria is given by the solution to a non-standard vector-valued forward-backward stochastic differential equation. Under some mild assumptions, we construct the solution in terms of expectations of the filtered states. We prove the MFG strategy forms an \epsilon-Nash equilibrium for the finite player game. Lastly, we present a least-squares Monte Carlo based algorithm for computing the optimal control and illustrate the results through simulation in market where agents disagree on the model.
[ joint work with Philippe Casgrain, U. Toronto ]
- Mathematical and Computational Finance Seminar