Relative Arbitrage Opportunities with Interactions among $N$ Investors

TL;DR

This paper models multi-investor market dynamics to identify conditions and strategies for relative arbitrage opportunities, deriving Nash equilibria in a coupled system.

Contribution

It introduces a McKean-Vlasov type market model incorporating investor interactions and provides conditions for arbitrage and optimal strategies.

Findings

Conditions for guaranteed relative arbitrage among investors.

Derivation of optimal strategies and Nash equilibrium.

Unique solution characterized by a Cauchy problem.

Abstract

The relative arbitrage portfolio outperforms a benchmark portfolio over a given time-horizon with probability one. With market price of risk processes depending on the market portfolio and investors, this paper analyzes the multi-agent optimization of relative arbitrage opportunities in the coupled system of market and wealth dynamics. We construct a well-posed market dynamical system of McKean-Vlasov type under an empirical measure of investors, where each investor seeks for relative arbitrage with respect to a benchmark dependent on market and all the agents. We show the conditions to guaranty relative arbitrage opportunities among competitive investors through the Fichera drift. Under mild conditions, we derive the optimal strategies for investors and the unique Nash equilibrium that depends on the smallest nonnegative solution of a Cauchy problem.