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has been cited by the following article:

• TITLE: A Trading Execution Model Based on Mean Field Games and Optimal Control

  AUTHORS: Lorella Fatone, Francesca Mariani, Maria Cristina Recchioni, Francesco Zirilli

  KEYWORDS: Trading Execution, Mean Field Game, Optimal Control

  JOURNAL NAME: Applied Mathematics, Vol.5 No.19, November 10, 2014

  ABSTRACT: We present a trading execution model that describes the behaviour of a big trader and of a multitude of retail traders operating on the shares of a risky asset. The retail traders are modeled as a population of “conservative” investors that: 1) behave in a similar way, 2) try to avoid abrupt changes in their trading strategies, 3) want to limit the risk due to the fact of having open positions on the asset shares, 4) in the long run want to have a given position on the asset shares. The big trader wants to maximize the revenue resulting from the action of buying or selling a (large) block of asset shares in a given time interval. The behaviour of the retail traders and of the big trader is modeled using respectively a mean field game model and an optimal control problem. These models are coupled by the asset share price dynamic equation. The trading execution strategy adopted by the retail traders is obtained solving the mean field game model. This strategy is used to formulate the optimal control problem that determines the behaviour of the big trader. The previous mathematical models are solved using the dynamic programming principle. In some special cases explicit solutions of the previous models are found. An extensive numerical study of the trading execution model proposed is presented. The interested reader is referred to the website: http://www.econ.univpm.it/recchioni/finance/w19 to find material including animations, an interactive application and an app that helps the understanding of the paper. A general reference to the work of the authors and of their coauthors in mathematical finance is the website:http://www.econ.univpm.it/recchioni/finance.