Trading: From Game Theory to Finance

Undergraduate / Graduate

This course studies trading in financial markets through the lens of game theory and asymmetric information. Trading models are at the heart of financial markets, and we trace the path from basic models in game theory and equilibrium economics to applied trading models in finance that have found immense use in practice. We look at how the asymmetric information framework gives rise to market microstructure trading, equilibrium tatonnement process gives rise to arbitrage trading, general equilibrium framework gives rise to beta-based trading, model uncertainty gives rise to alpha-based trading, and event uncertainty gives rise to option trading. The course combines a theoretical framework with applied analysis. Topics covered include: information structures, Bayesian probability, Blackwell's theorem, basics of rational expectations equilibrium, Bayes Nash equilibrium, limit order books, bid-ask spread formation, asymmetric information models of microstructure trading, PIN model, capital asset pricing model, beta and index fund trading, alpha and hedge fund trading, speculative trading with options, high-frequency trading, arbitrage and behavioral trading models.