Differential Beliefs in Financial Markets Under Information Constraints: A Modeling Perspective
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arXiv
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| Format: | Preprint |
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2025
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| author | Grigorian, Karen Jarrow, Robert |
| author_facet | Grigorian, Karen Jarrow, Robert |
| contents | We apply the theory of McKean-Vlasov-type SDEs to study several problems related to market efficiency in the context of partial information and partially observable financial markets: (i) convergence of reduced-information market price processes to the true price process under an increasing information flow; (ii) a specific mechanism of shrinking biases under increasing information flows; (iii) optimal aggregation of expert opinions by a trader seeking a positive alpha. All these problems are studied by means of (conditional) McKean-Vlasov-type SDEs, Wasserstein barycenters, KL divergence and relevant tools from convex optimization, optimal control and nonlinear filtering. We supply the theoretical results in (i)-(iii) with concrete simulations demonstrating how the proposed models can be applied in practice to model financial markets under information constraints and the arbitrage-seeking behavior of traders with differential beliefs. |
| format | Preprint |
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arxiv_https___arxiv_org_abs_2511_01486 |
| institution | arXiv |
| publishDate | 2025 |
| record_format | arxiv |
| spellingShingle | Differential Beliefs in Financial Markets Under Information Constraints: A Modeling Perspective Grigorian, Karen Jarrow, Robert Mathematical Finance 49K45, 60H10, 93E11, 91G80 We apply the theory of McKean-Vlasov-type SDEs to study several problems related to market efficiency in the context of partial information and partially observable financial markets: (i) convergence of reduced-information market price processes to the true price process under an increasing information flow; (ii) a specific mechanism of shrinking biases under increasing information flows; (iii) optimal aggregation of expert opinions by a trader seeking a positive alpha. All these problems are studied by means of (conditional) McKean-Vlasov-type SDEs, Wasserstein barycenters, KL divergence and relevant tools from convex optimization, optimal control and nonlinear filtering. We supply the theoretical results in (i)-(iii) with concrete simulations demonstrating how the proposed models can be applied in practice to model financial markets under information constraints and the arbitrage-seeking behavior of traders with differential beliefs. |
| title | Differential Beliefs in Financial Markets Under Information Constraints: A Modeling Perspective |
| topic | Mathematical Finance 49K45, 60H10, 93E11, 91G80 |
| url | https://arxiv.org/abs/2511.01486 |