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Game Theory Applied to the Financial Markets
  • João Freitas,
  • Alberto Pinto,
  • Óscar Felgueiras
João Freitas
FCUP

Corresponding Author:[email protected]

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Alberto Pinto
Universidade do Porto Faculdade de Ciencias
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Óscar Felgueiras
Universidade do Porto Faculdade de Ciencias
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Abstract

We model the financial markets as a game and make predictions using Markov chains estimators. We extract the possible patterns displayed by the financial markets, define a game where one of the players is the speculator, whose strategies depend on his/hers risk-toreward preferences, and the market is the other player, whose strategies are the previously observed patterns. Then we estimate the market’s mixed probabilities by defining Markov chains and utilizing its transitions matrices. Afterwards, we use these probabilities to determine which is the optimal strategy for the speculator. Finally, we apply these models to real-time market data to determine its feasibility.