The Annals of Applied Probability

Financial markets with a large trader

Tilmann Blümmel and Thorsten Rheinländer

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Abstract

We construct a large trader model using tools from nonlinear stochastic integration theory and an impact function. It encompasses many well-known models from the literature. In particular, the model allows price changes to depend on the size as well as on the speed and timing of the large trader’s transactions. Moreover, a volume impact limit order book can be studied in this framework. Relaxing a condition about existence of a universal martingale measure governing all resulting small trader models, we can show absence of arbitrage for the small trader under mild conditions. Furthermore, a case study on utility maximization from terminal wealth highlights new phenomena that can arise in our framework. Finally, an outlook on further research provides insights on (no) arbitrage opportunities for the large trader and how different levels of information may affect our analysis.

Article information

Source
Ann. Appl. Probab., Volume 27, Number 6 (2017), 3735-3786.

Dates
Received: December 2015
Revised: November 2016
First available in Project Euclid: 15 December 2017

Permanent link to this document
https://projecteuclid.org/euclid.aoap/1513328713

Digital Object Identifier
doi:10.1214/17-AAP1295

Mathematical Reviews number (MathSciNet)
MR3737937

Zentralblatt MATH identifier
06848278

Subjects
Primary: 60H05: Stochastic integrals 91G10: Portfolio theory

Keywords
Large trader limit order book no arbitrage nonlinear stochastic integration portfolio optimization

Citation

Blümmel, Tilmann; Rheinländer, Thorsten. Financial markets with a large trader. Ann. Appl. Probab. 27 (2017), no. 6, 3735--3786. doi:10.1214/17-AAP1295. https://projecteuclid.org/euclid.aoap/1513328713


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