A Mean-Field Game of Market Entry: Portfolio Liquidation with Trading Constraints

Paper: arXiv 2403.10441

Authors: Guanxing Fu, Paul P. Hager, Ulrich Horst

Abstract

We consider both $N$-player and mean-field games of optimal portfolio liquidation in which the players are not allowed to change the direction of trading. Players with an initially short position of stocks are only allowed to buy while players with an initially long position are only allowed to sell the stock. Under suitable conditions on the model parameters we show that the games are equivalent to games of timing where the players need to determine the optimal times of market entry and exit. We identify the equilibrium entry and exit times and prove that equilibrium mean-trading rates can be characterized in terms of the solutions to a highly 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 both in the mean-field and the $N$-player game.

Complexity vs Empirical Score

• Math Complexity: 9.2/10
• Empirical Rigor: 1.5/10
• Quadrant: Lab Rats — theoretically deep, empirically untested

Why this score: The paper provides a rigorous mathematical framework for mean-field games in optimal liquidation with unilateral trading constraints, establishing existence and uniqueness of equilibria via complex nonlinear integral equations. However, it is entirely theoretical with no empirical backtesting or real-world dataset validation.

Research Flowchart

  flowchart TD
    A[Goal: Analyze N-Player & Mean-Field Games of Portfolio Liquidation with No-Short-Selling Constraints] --> B[Model Formulation: Set Up Trading Rate Constraints for Long & Short Positions]
    B --> C[Methodology: Reformulate Liquidation Problem as a Game of Timing for Entry/Exit]
    C --> D[Mathematical Derivation: Express Equilibrium Rates via Non-Linear Higher-Order Integral Equation]
    D --> E[Analysis: Prove Unique Solution to Integral Equation & Endogenous Terminal Condition]
    E --> F[Outcome: Establish Unique Equilibrium in Both N-Player and Mean-Field Games]