Article ID: | iaor201111396 |
Volume: | 1 |
Issue: | 2 |
Start Page Number: | 220 |
End Page Number: | 252 |
Publication Date: | Jun 2011 |
Journal: | Dynamic Games and Applications |
Authors: | Basak K, Ghosh K, Mukherjee Diganta |
Keywords: | game theory, simulation: applications |
We study the influence of large traders in the stock market in the presence of a fringe of marginal ‘noise traders’. We formulate a trade model relating stock price to the demand strategies of these traders who wish to maximize their payoffs. Using the Nash equilibrium concept, we compute the optimal value functions for the large traders and study the stability of the state process (log price) under equilibrium strategies of the large traders. In the process, we propose two measures. The first one is to measure the big traders’ total faith on the market’s valuation (