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on Game Theory |
| By: | Alistair Wilson |
| Abstract: | We analyze a dynamic matching mechanism developed for the UEFA Champions League, the largest and most-watched football club competition worldwide. First, we theoretically characterize the assignment rule developed by UEFA by solving a complex constrained assignment problem with a publicly verifiable draw. Then, using a structural model of the assignments and data from the UEFA Champions League 2004 and 2018 seasons we show that the constraints cause quantitatively large spillovers to unconstrained teams. Nevertheless, we conclude that the UEFA draw is close to a constrained-best in terms of fairness. Moreover, we find that it is feasible to substantially reduce the distortions by only marginally slacking the constraints. |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:pit:wpaper:6534&r=all |
| By: | Markos Epitropou (Department of Electrical and Systems Engineering, University of Pennsylvania); Rakesh Vohra (Department of Economics, University of Pennsylvania) |
| Abstract: | We consider a principal who allocates an indivisible object among a finite number of agents who arrive on-line, each of whom prefers to have the object than not. Each agent has access to private information about the principal's payoff if he receives the object. The decision to allocate the object to an agent must be made upon arrival of an agent and is irreversible. There are no monetary transfers but he principal can inspect agents' reports at a cost and punish them. A novelty of this paper is a reformulation of this dynamic problem as a compact linear program. Using the formulation we characterize the form of the optimal mechanism and reduce the dynamic version of the inspection problem with identical distributions to an instance of the secretary problem with one fewer secretary and a modified value distribution. This reduction also allows us to derive a prophet inequality for the dynamic version of the inspection problem. |
| Keywords: | Dynamic mechanism design, stopping problems, costly verification |
| JEL: | C61 D44 D82 |
| Date: | 2019–02–18 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:19-002&r=all |
| By: | Duccio Gamannossi degl’Innocenti (University of Exeter, UK); Matthew D. Rablen (University of Sheffield, UK) |
| Abstract: | We relate tax evasion behavior to a substantial literature on social comparison in judgements. Taxpayers engage in tax evasion as a means to boost their expected consumption relative to others in their social network. The unique Nash equilibrium of the model relates optimal evasion to a (Bonacich) measure of network centrality: more central taxpayers evade more. Given that tax authorities are now investing heavily in big-data tools that aim to construct social networks, we investigate the value of acquiring network information. We do this using networks that allow for celebrity taxpayers, whose consumption is widely seen, and who are systematically of higher wealth. We show that there are pronounced returns to the initial acquisition of network information, albeit targeting audits with highly incomplete knowledge of social networks may be counterproductive. |
| Keywords: | Tax Evasion; Social Networks; Network centrality; Optimal Auditing; Social Comparison; Relative Consumption |
| JEL: | H26 D85 K42 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:shf:wpaper:2019005&r=all |
| By: | Sonntag, Axel; Poulsen, Anders |
| Abstract: | We experimentally examine the effects of varying time pressure in a coordination game with a label salient focal equilibrium. We consider both a pure coordination game (payoff symmetry) and a battle of the sexes game with conflict of interest (payoff asymmetry). In symmetric games, there are no effects of time pressure, since the label-salient outcome is highly focal regardless of how much time subjects have to decide. In asymmetric games, less time results in greater focality of the the label-salient action, and it becomes significantly more likely that any coordination is on the focal outcome. |
| Keywords: | coordination game; focal point; time pressure; response times; social heuristics hypothesis; experiment |
| JEL: | C70 C72 C92 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:92262&r=all |
| By: | Ana Paula Buhse; José Pedro Pontes |
| Abstract: | In this paper, we try to assess the ability of educationally backward countries, such as Portugal, to catch-up with more developed nations withinthe EU. For that purpose,we use a framework composed by a symmetric coordination n person game that is played by a set of candidates to attend a post-compulsory educational degree, such as university. Higher education has a positive payoff only if a "critical mass" (indeed the unanimity)of students with a low socioeconomic background decide to attend the university. Two strict Nash equilibria exist in this game: either all players decide to attend the university or none does it in equilibrium. By using the "risk dominance"approach to the selection of a unique Nash equilibrium that was suggested by HARSANYI and SELTEN (1988), we are able to recognize the factors that make either strict Nash equilibrium the likelysolution. In spite of the progress they have achieved in schooling, structurally lagging countries such as Portugal seem to be hindered in education development by the fact that, in a large majority of households, income is low and parents lack post-compulsory education. While low household income makes the relative cost of university education high even if tuition fees are modest, a small share of highly educated parents makes the achievement of a "critical mass" of students who attend the university more difficult and thus renders the benefits of college education riskier and less safe. |
| Keywords: | Higher Education; Regional Development; Coordination Games; Risk Dominance. |
| JEL: | C72 I20 O12 R11 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:ise:remwps:wp0752019&r=all |
| By: | Osawa, Minoru; Akamatsu, Takashi |
| Abstract: | This paper addresses a longstanding stability issue of equilibria in a seminal model in spatial economic theory, making use of the potential game approach. The model explains the formation of multiple business centers in cities as an equilibrium outcome under the presence of commuting costs of households and positive production externalities between firms. We fist show that the model can be viewed as a large population (nonatomic) potential game. To elucidate properties of stable spatial equilibria in the model, we select global maximizers of the potential function, which are known to be globally stable under various learning dynamics. We find that the formation of business centers (agglomeration of firms) is possible only when the commuting costs of households are sufficiently low and that the size (number) of business centers increases (decreases) monotonically as communication between firms becomes easier. Our results indicate a new range of applications, i.e., spatial economic models, for the theory of potential games. |
| Keywords: | Agglomeration; multiple equilibria; equilibrium selection; potential game; global stability. |
| JEL: | C62 C72 C73 R14 |
| Date: | 2019–02–26 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:92395&r=all |
| By: | Daske, Thomas |
| Abstract: | This study explores mechanism design for networks of interpersonal relationships. Agents' social (i.e., altruistic or spiteful) preferences and private payoffs are all subject to asymmetric information; utility is (quasi-)linear, types are independent. I show that any network of at least three agents can resolve any allocation problem with a mechanism that is Bayesian incentive-compatible, ex-interim individually rational, and ex-post Pareto-efficient (also ex-post budget-balanced). By contrast, a generalized Myerson-Satterthwaite theorem is established for two agents. The central tool to exploit the asymmetry of information about agents' social preferences is "gamification": Resolve the agents' allocation problem with an efficient social-preference robust mechanism; ensure agents' participation with the help of a mediator, some network member, who complements that mechanism with an unrelated hawk-dove like game between the others, a game that effectively rewards (sanctions) strong (poor) cooperation at the expense (to the benefit) of the mediator. Ex interim, agents (and the mediator) desire this game to be played, for it provides them with a platform to live out their propensities to cooperate or compete. - A figurative example is a fund-raiser, hosted by the "mediator", complemented with awarding the best-dressed guest. |
| Keywords: | networks,social preferences,mechanisms,gamification,Coase theorem |
| JEL: | C70 D62 D64 D82 D85 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esprep:193148&r=all |
| By: | Jeongwoo Lee (University of Florida); Jaeok Park (Yonsei University) |
| Abstract: | This paper analyzes a scenario in which two objects are sold in sequence at two second-price auctions. There are two bidders, and each bidder's valuations of the two objects are affiliated. Participating in each auction is costly. Bidders decide whether to enter each auction, observing their entry decisions in any previous auction. We study the properties of equilibria and provide a sufficient condition for their existence. Due to affiliation, a bidder's entering the first auction may signal his strong interest in the second object. Hence, a bidder with a higher valuation of the second object tends to participate in the first auction more aggressively in order to preempt the opponent's entry into the second auction. Because of this signaling motive, the sequential auction format can generate higher revenue in the first auction and lower revenue in the second auction than those obtained by the simultaneous counterpart. |
| Keywords: | Sequential auctions; participation cost; preemptive entry; signaling; |
| JEL: | D44 D82 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:yon:wpaper:2019rwp-141&r=all |
| By: | Bellemare, Charles (Université Laval); Sebald, Alexander (University of Copenhagen) |
| Abstract: | We derive bounds on the causal effect of belief-dependent preferences (reciprocity and guilt aversion) on choices in sequential two-player games without exploiting information or data on the (higher-order) beliefs of players. We show how informative bounds can be derived by exploiting a specific invariance property common to those preferences. We illustrate our approach by analyzing data from an experiment conducted in Denmark. Our approach produces tight bounds on the causal effect of reciprocity in the games we consider. These bounds suggest there exists significant reciprocity in our population – a result also substantiated by the participants' answers to a post-experimental questionnaire. On the other hand, our approach yields high implausible estimates of guilt aversion. We contrast our estimated bounds with point estimates obtained using data on self-declared higher-order beliefs, keeping all other aspects of the model unchanged. We find that point estimates fall within our estimated bounds suggesting that elicited higher-order belief data in our experiment is weakly (if at all) affected by a potential endogeneity problem due to e.g. false consensus effects. |
| Keywords: | belief-dependent preferences, partial identification |
| JEL: | C93 D63 D84 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp12153&r=all |
| By: | Auster, Sarah; Kos, Nenad; Piccolo, Salvatore |
| Abstract: | We study a model of optimal pricing where the right to propose a mechanism is determined endogenously: a privately informed buyer covertly invests to increase the probability of offering a mechanism. We establish the existence of equilibrium and show that higher types get to propose a mechanism more often than lower types allowing the seller to learn from the trading process. In any equilibrium, the seller either offers the price he would have offered if he was always the one to make an offer or randomises over prices. Pure strategy equilibria may fail to exist, even when types are continuously distributed. A full characterization of equilibria is provided in the model with two types, where notably the seller's profit is shown to be non-monotonic in the share of high-value buyers. |
| Keywords: | bargaining power; mechanism design; Optimal Pricing |
| JEL: | C72 D82 D83 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13542&r=all |
| By: | Cespa, Giovanni; Vives, Xavier |
| Abstract: | We assess the consequences for market quality and welfare of different entry regimes and exchange pricing policies in a context of limited market participation. To this end we integrate a two-period market microstructure model with an exchange competition model with entry in which exchanges supply technological services, and have market power. We find that technological services can be strategic substitutes or complements in platform competition. Free entry of platforms delivers a superior outcome in terms of liquidity and (generally) welfare compared to the case of an unregulated monopoly. Controlling entry or, even better typically, platform fees may further increase welfare. The market may deliver excessive or insufficient entry. However, if the regulator is constrained to not making transfers to platforms then there is never insufficient entry. |
| Keywords: | Cournot with free entry; Endogenous Market Structure; Industrial Organization of Exchanges; market fragmentation; platform competition; welfare |
| JEL: | G10 G12 G14 |
| Date: | 2018–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13415&r=all |
| By: | Bezin, Emeline; Chabé-Ferret, Bastien; de la Croix, David |
| Abstract: | Fertility becomes a strategic choice when having a larger population helps to gain power. Minority groups might find it optimal to promote high fertility among their members - this is known as the "weapon of the womb" argument. If, in addition, parents have to invest resources to educate their children, a higher fertility for strategic motives might reduce their investment. Indonesian census data dispel this view, as minority religious groups do not invest less in education. If anything, they invest more in education, as well as in their number of children. This finding is consistent with human capital being an input to appropriation. Solving for the Nash equilibrium of a game between two groups with two strategic variables, we derive the condition under which the minority group displays a higher investment in both the quantity and quality of children. The material cost of conflict involved through the weapon of the womb mechanism is mitigated when human capital enters the contest function. |
| Keywords: | conflict; Fertility; Human Capital; Indonesia; minorities; Nash equilibrium; population engineering; quality-quantity trade-off |
| JEL: | D74 J13 J15 |
| Date: | 2018–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13412&r=all |
| By: | Matthew Embrey (Department of Economics, University of Sussex, Brighton, UK); Kyle Hyndman (Naveen Jindal School of Management, University of Texas at Dallas, USA); Arno Riedl (Department of Economics, Maastricht University, The Netherlands) |
| Abstract: | Most negotiations involve risks that are only resolved ex-post and often these risks are not incurred equally by the parties involved. We experimentally investigate bargaining situations where a residual claimant is exposed to ex-post risk, whereas a fixedpayoff player is not. We find that residual claimants extract a risk premium, which increases in risk exposure and that this premium is sometimes high enough to make it beneficial to bargain over a risky rather than a risk-less pie. In contrast to predictions of a benchmark model, it is the comparatively less risk averse residual claimants who benefit the most and this is driven by fixed-payoff player's adoption of weak bargaining strategies when the pie is risky. It is also the less risk averse who, when given the choice, choose to bargain over a riskier distribution. We also show that as risk increases, conflict about what constitutes a fair compensation for risk exposure is enhanced, which increases bargaining frictions. |
| Keywords: | Bargaining, Ex-post Risk, Reference Points |
| JEL: | C71 C92 D81 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:sus:susewp:0419&r=all |
| By: | Cécile Bazart; Mathieu Lefebvre; Julie Rosaz |
| Abstract: | In a series of experiments, we test the relative efficiency of persuasion and commitment schemes to increase and sustain contribution levels in a Voluntary Contribution Game. The design allows to compare a baseline consisting of a repeated public good game to, respectively, four manipulation treatments relying on: an information strategy, a low commitment strategy, a high commitment strategy and a promise strategy. We confirm the advantages of psychologically orientated policies as they increase the overall level of contribution and for some, that is commitment and promises, question the decreasing trend traditionally observed in long term contributions to public goods. |
| Keywords: | Experiment, Persuasion, Commitment, Voluntary Contribution Mechanism. |
| JEL: | C91 D91 H41 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2019-05&r=all |
| By: | Klaus Abbink (Monash Business School); Lu Dong (Economics Experimental Laboratory, Nanjing Audit University); Lingbo Huang (Economics Experimental Laboratory, Nanjing Audit University) |
| Abstract: | We study escalation and aggression in an experimental first-strike game in which two participants play multiple rounds of a money-earning task. In each round, both players can spend money to accumulate weapons. The player with more weapons can spend money to strike against the other player, which almost totally eliminates the victim’s earnings potential and removes their capacity to strike. Weapons can serve as a means of deterrence. In four treatments, we find that deterrence is strengthened if weapon stocking cannot be observed, that a balance of power is effective in maintaining peace, and that mutually beneficial trade decreases the risk of confrontation, but not necessarily the likelihood of costly arms races. |
| Keywords: | Mutually assured destruction, balance of power, arms races, deterrence, trade, laboratory experiment |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:not:notcdx:2019-01&r=all |
| By: | Calvano, Emilio; Calzolari, Giacomo; Denicolò, Vincenzo; Pastorello, Sergio |
| Abstract: | Increasingly, pricing algorithms are supplanting human decision making in real marketplaces. To inform the competition policy debate on the possible consequences of this development, we experiment with pricing algorithms powered by Artificial Intelligence (AI) in controlled environments (computer simulations), studying the interaction among a number of Q-learning algorithms in a workhorse oligopoly model of price competition with Logit demand and constant marginal costs. In this setting the algorithms consistently learn to charge supra-competitive prices, without communicating with one another. The high prices are sustained by classical collusive strategies with a finite phase of punishment followed by a gradual return to cooperation. This finding is robust to asymmetries in cost or demand and to changes in the number of players. |
| Keywords: | artificial intelligence; Collusion; Pricing-Algorithms; Q-Learning; Reinforcement Learning |
| JEL: | D43 D83 L13 L41 |
| Date: | 2018–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13405&r=all |
| By: | Alistair Wilson |
| Abstract: | In dynamic environments where the strategic setting evolves across time the specific rule governing the transitions can substantially alter the incentives that agents face. This is particularly true when history-dependent strategies are used. In a laboratory study we examine whether subjects respond to the transition rule and internalize its effects on continuation values. Our main comparison is between an endogenous transition, where future states directly depend on current choices, and exogenous transitions, where the future environment is random and independent of current choices. Our evidence shows that subjects readily internalize the effect of the dynamic game transition rule on their incentives, in line with theoretical predictions. |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:pit:wpaper:6533&r=all |
| By: | Matthew Gould (Brunel University, UK); Matthew D. Rablen (University of Sheffield, UK) |
| Abstract: | Tax authorities worldwide are implementing voluntary disclosure schemes to recover tax on offshore investments. The US and UK, in particular, have implemented such schemes in response to bulk acquisitions of information on o¤shore holdings, recent examples of which are the Paradise and Panama papers. Schemes oter affected investors the opportunity to make a voluntary disclosure, with reduced ne rates for truthful disclosure. Might such incentives, once anticipated by investors, simply encourage evasion in the rst place? We characterize the investor/tax authority game with and without a scheme, allowing for the possibility that some o¤shore investment has legitimate economic motives. We show that a scheme increases net expected tax revenue, decreases illegal o¤shore investment, increases onshore investment, but could either increase or decrease legal o¤shore investment. The optimal disclosure scheme o¤ers maximal incentives for truthful disclosure by imposing the minimum allowable rate of ne. |
| Keywords: | voluntary disclosure; offshore tax evasion; tax amnesty; third party information |
| JEL: | H26 D85 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:shf:wpaper:2019006&r=all |
| By: | Eliaz, Kfir; Spiegler, Ran; Thysen, Heidi Christina |
| Abstract: | We study strategic communication when the sender can influence the receiver's understanding of messages' equilibrium meaning. We focus on a "pure persuasion" setting, in which the informed sender wants the uninformed receiver to always choose "accept". The sender's strategy maps each state of Nature to a distribution over pairs consisting of: (i) a multi-dimensional message, and (ii) a "dictionary" that credibly discloses the state-dependent distribution of some of the messsage's components. The receiver does not know the sender's strategy by default; he can only interpret message components that are covered by the dictionary he is provided with. We characterize the sender's optimal persuasion strategy and show that full persuasion is possible when the prior on the acceptance state exceeds a threshold that quickly decreases with message dimensionality. We extend our analysis to situations where interpretation of messages is done by a third party with uncertain preferences, and explore alternative notions of "dictionaries". |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13441&r=all |
| By: | Buccella, Domenico; Fanti, Luciano |
| Abstract: | In a vertically related duopoly with input price bargaining, this paper re-examines the downstream firms’ profitability under different market competition degrees. Downstream firms earn highest profits with semi-collusion whose level depends on product differentiation and relative parties’ bargaining power. Holding fixed the upstream suppliers’ bargaining power, the more the products are differentiated, the higher the downstream firms’ collusive level that maximize profits, regardless of the negotiations’ structure. On the other hand, holding fixed the product differentiation degree: 1) with uncoordinated bargaining, the higher the upstream suppliers’ bargaining power is, the lower the downstream firms’ collusive level is; 2) with upstream firms’ bargaining coordination, a U-shaped relation exists between the upstream firms’ power and the downstream firms’ collusive level that maximizes their profits. |
| Keywords: | Decentralized/semi-coordinated bargaining; Right-to-Manage; Conjectural Variation model |
| JEL: | D43 J51 L13 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:92266&r=all |
| By: | Beissner, Patrick (ANU); Riedel, Frank (IMW Bielefeld University) |
| Abstract: | We study economies in which agents face Knightian uncertainty about state prices. Knightian uncertainty leads naturally to nonlinear expectations. We introduce a corresponding equilibrium concept with sublinear prices and prove that equilibria exist under weak conditions. In general, such equilibria lead to Pareto inefficient allocations; the equilibria coincide with Arrow-Debreu equilibria only if the values of net trades are ambiguity-free in the mean. In economies without aggregate uncertainty, inefficiencies are generic. We introduce a constrained efficiency concept, uncertainty-neutral efficiency, equilibrium allocations under price uncertainty are efficient in this constrained sense. Arrow-Debreu equilibria turn out to be non-robust with respect to the introduction of Knightian uncertainty. |
| Keywords: | ; |
| Date: | 2019–02–23 |
| URL: | http://d.repec.org/n?u=RePEc:rco:dpaper:142&r=all |
| By: | Brañas-Garza, Pablo; Cabrales, Antonio; Mateu, Guillermo; Sánchez, Angel; Sutan, Angela |
| Abstract: | We study experimentally the impact of pre-play social interactions on negotiations. These interactions are often complex. Thus, we attempt to isolate the impact of several of its more common components: conversations, food, and beverages, which could be alcoholic or nonalcoholic. To do this, our subjects take part in a standardized negotiation (complex and simple) under six conditions: without interaction, interaction only, and interactions with water, wine, water and food and wine and food. We find that none of the treatments improve the outcomes over the treatment without interactions. We also study trust and reciprocity in the same context. For all-male groups, we find the same lack of superiority of interaction treatments over no interaction. For all-female groups, some very simple social interactions have a positive impact on trust. |
| Keywords: | business meals; negotiation; Social interactions; Trust |
| JEL: | C91 I18 M11 |
| Date: | 2018–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13417&r=all |
| By: | Enache, Andrea; Florens, Jean-Pierre |
| Abstract: | The first novelty of this paper is that we show global identification of the private values distribution in a sealed-bid third-price auction model using a fully nonparametric methodology. The second novelty of the paper comes from the study of the identification and estimation of the model using a quantile approach. We consider an i.i.d. private values environment with risk-averse bidders. In the first place, we consider the case where the risk-aversion parameter is known. We show that the speed of convergence in process of our nonparametric estimator produces at the root-n parametric rate and we explain the intuition behind this apparently surprising result. Next, we consider that the risk-aversion parameter is unknown and we locally identify it using exogenous variation in the number of participants. We extend our procedure to the case where we observe only the bids corresponding to the transaction prices, and we generalize the model so as to account for the presence of exogenous variables. The methodological toolbox used to analyse identification of the third-price auction model can be employed in the study of other games of incomplete information. Our results are interesting also from a policy perspective,as some authors recommend the use of the third-price auction format for certain Internet auctions. Moreover, we contribute to the econometric literature on auctions using a quantile approach. |
| Keywords: | structural nonparametric estimation; nonlinear inverse problems; global identification; functional convergence of estimators; third-price auction mode |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:26557&r=all |
| By: | Bell-Aldeghi, Rosalind |
| Abstract: | As health expenditure and need for corresponding funding rises, resorting to topping up insurance can seem natural. Complementary and supplementary insurances are both topping up contracts and, as such, are treated as one in the theoretical literature on optimal insurance. We argue that distinguishing them is crucial, and should be considered carefully when defining policies impacting the structure of the health insurance system, as these two kinds of insurance can have opposite effects on social insurance coverage. \indent In this model, the optimal social insurance rate is defined endogenously and varies according to redistribution and the ex-post moral hazard characteristics of the insurance. This game has three stages and is solved through backward induction. The optimal social insurance rate is chosen first, by maximising social welfare. Second, individuals choose their private complementary and supplementary contracts. In the third stage they decide on their level of labour and consumption of health and other goods. \indent Results indicate that whereas the presence of complementary insurance decreases the optimal size of social insurance, the offset effects of supplementary insurance can improve welfare. |
| Keywords: | Social insurance; health insurance; ex-post moral hazard; topping up; redistribution. |
| JEL: | D82 I13 I18 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:92417&r=all |
| By: | Charles-Albert Lehalle; Charafeddine Mouzouni |
| Abstract: | This paper goes beyond the optimal trading Mean Field Game model introduced by Pierre Cardaliaguet and Charles-Albert Lehalle in [Cardaliaguet, P. and Lehalle, C.-A., Mean field game of controls and an application to trade crowding, Mathematics and Financial Economics (2018)]. It starts by extending it to portfolios of correlated instruments. This leads to several original contributions: first that hedging strategies naturally stem from optimal liquidation schemes on portfolios. Second we show the influence of trading flows on naive estimates of intraday volatility and correlations. Focussing on this important relation, we exhibit a closed form formula expressing standard estimates of correlations as a function of the underlying correlations and the initial imbalance of large orders, via the optimal flows of our mean field game between traders. To support our theoretical findings, we use a real dataset of 176 US stocks from January to December 2014 sampled every 5 minutes to analyze the influence of the daily flows on the observed correlations. Finally, we propose a toy model based approach to calibrate our MFG model on data. |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1902.09606&r=all |