PROFIT MAXIMIZING AND PRICE DISTORTION MINIMIZING CODES FOR A CHANNELMODEL OF AN ASSET MARKET

A model of an asset market with noiseless price feedback is shown to a chieve maximum profits for the market traders and also to achieve a po int on the rate distortion function of the market input. A simplified version of the model, which is empirically more robust than the origin al, is shown to be a market operating with a fixed signal power. For t his version it is found that there is a tradeoff between trader profit s and price distortion. Unlike a pure communication channel, the marke t has its mutual information set by informed traders to maximize expec ted profits rather than set to minimize distortion. It is found that e xpected profits are maximized when there is just the right amount of p rice distortion.