Information-based trading

Journal article

in the future. Market information is modeled in line with the scheme of Brody, Hughston, and Macrina. The risk-neutral distribution of the cash flow is known to the traders, who make prices with a fixed multiplicative bid-offer spread and report their prices to a game master who declares that a trade has been made when the bid price of one of the traders crosses the offer price of the other. We prove that the value of the first trader’s position is strictly greater than that of the second. The results are analyzed by use of simulation studies and generalized to situations where (a) there is a hierarchy of traders, (b) there are multiple successive trades, and (c) there is inventory aversion. In these settings, we show that information is superior to strategy.

Authors: Bouzianis, G; Hughston, LP; Sánchez-Betancourt, L

• Publication status: Published
• Peer review status: Peer reviewed
• Publisher: World Scientific Publishing
• Journal: International Journal of Theoretical and Applied Finance
• Volume: 27
• Issue: 03n04
• Article number: 2350030
• Publication date: 2024-02-28
• Acceptance date: 2024-01-22
• DOI: 10.1142/s0219024923500309
• EISSN: 1793-6322
• ISSN: 0219-0249
• Language: English
• Keywords: signal to noise ratio; information processes; information-based asset pricing; inventory aversion; bid-offer spread; Brownian bridge informed traders; nonlinear filtering; trading models