Mean-Field Liquidation Games with Market Drop-out

Guanxing Fu; Paul P. Hager; Ulrich Horst

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arXiv · 2303.05783

Mean-Field Liquidation Games with Market Drop-out

Guanxing Fu·Paul P. Hager·Ulrich Horst

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Abstract

We consider a novel class of portfolio liquidation games with market drop-out ("absorption"). More precisely, we consider mean-field and finite player liquidation games where a player drops out of the market when her position hits zero. In particular round-trips are not admissible. This can be viewed as a no statistical arbitrage condition. In a model with only sellers we prove that the absorption condition is equivalent to a short selling constraint. We prove that equilibria (both in the mean-field and the finite player game) are given as solutions to a non-linear higher-order integral equation with endogenous terminal condition. We prove the existence of a unique solution to the integral equation from which we obtain the existence of a unique equilibrium in the MFG and the existence of a unique equilibrium in the $N$-player game. We establish the convergence of the equilibria in the finite player games to the obtained mean-field equilibrium and illustrate the impact of the drop-out constraint on equilibrium trading rates.

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Guanxing Fu, Paul P. Hager, Ulrich Horst. 2023-03-10. Mean-Field Liquidation Games with Market Drop-out. https://arxiv.org/abs/2303.05783

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