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Profit maximizing and price distortion minimizing codes for a channel model of an asset market

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1 Author(s)
O'Neill, W. ; Dept. of Electr. Eng. & Comput. Sci., Illinois Univ., Chicago, IL, USA

A model of an asset market with noiseless price feedback is shown to achieve maximum profits for the market traders and also to achieve a point on the rate distortion function of the market input. A simplified version of the model, which is empirically more robust than the original, is shown to be a market operating with a fixed signal power. For this version it is found that there is a tradeoff between trader profits and price distortion. Unlike a pure communication channel, the market has its mutual information set by informed traders to maximize expected profits rather than set to minimize distortion. It is found that expected profits are maximized when there is just the right amount of price distortion

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Information Theory, IEEE Transactions on  (Volume:41 ,  Issue: 6 )