A Mean-Field Game of Market Entry: Portfolio Liquidation with Trading Constraints

We consider both N-player and mean-field games of optimal portfolio liquidation in which the players are not allowed to change the direction of trading. Players with an initial short position of stocks are only allowed to buy, while players with an initial long position are only allowed to sell the stock. Under suitable conditions on the model parameters, we show that the games are equivalent to games of timing where the players need to determine the optimal times of market entry and exit. We identify the equilibrium entry and exit times and prove that equilibrium mean-trading rates can be characterized in terms of the solutions to a highly nonlinear higher-order integral equation with endogenous terminal condition. We prove the existence of a unique solution to the integral equation from which we obtain the existence of a unique equilibrium both in the mean-field and the N-player game.

Funding: G. Fu received financial support from the National Natural Science Foundation of China [Grants 12471453 and 12101523], the Hong Kong Research Grants Council (Early Career Scheme) [Grant 25215122], and internal grants. U. Horst received financial support from the Deutsche Forschungsgemeinschaft [Collaborate Research Centres/Transregio 388 “Rough Analysis, Stochastic Dynamics and Related Fields” Project ID 516748464].