In this section
@article{Brody:2009:10.1098/rspa.2008.0465,
author = {Brody, DC and Davis, MHA and Friedman, RL and Hughston, LP},
doi = {10.1098/rspa.2008.0465},
journal = {Proceedings of the Royal Society A: Mathematical, Physical and Engineering Sciences},
pages = {1103--1122},
title = {Informed traders},
url = {http://dx.doi.org/10.1098/rspa.2008.0465},
volume = {465},
year = {2009}
}
TY - JOUR
AB - An asymmetric information model is introduced for the situation in which there is a small agent who is more susceptible to the flow of information in the market than the general market participant, and who tries to implement strategies based on the additional information. In this model market participants have access to a stream of noisy information concerning the future return of an asset, whereas the informed trader has access to a further information source which is obscured by an additional noise that may be correlated with the market noise. The informed trader uses the extraneous information source to seek statistical arbitrage opportunities, while at the same time accommodating the additional risk. The amount of information available to the general market participant concerning the asset return is measured by the mutual information of the asset price and the associated cash flow. The worth of the additional information source is then measured in terms of the difference of mutual information between the general market participant and the informed trader. This difference is shown to be nonnegative when the signal-to-noise ratio of the information flow is known in advance. Explicit trading strategies leading to statistical arbitrage opportunities, taking advantage of the additional information, are constructed, illustrating how excess information can be translated into profit.
AU - Brody,DC
AU - Davis,MHA
AU - Friedman,RL
AU - Hughston,LP
DO - 10.1098/rspa.2008.0465
EP - 1122
PY - 2009///
SN - 1364-5021
SP - 1103
TI - Informed traders
T2 - Proceedings of the Royal Society A: Mathematical, Physical and Engineering Sciences
UR - http://dx.doi.org/10.1098/rspa.2008.0465
UR - http://rspa.royalsocietypublishing.org/content/early/2009/02/06/rspa.2008.0465.full.pdf+html
UR - http://hdl.handle.net/10044/1/64374
VL - 465
ER -
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