A new equilibrium trading model with asymmetric information

Lianzhang Bao; Guangliang Zhao; Zhuo Jin; Lianzhang Bao; Guangliang Zhao; Zhuo Jin

doi:10.3934/QFE.2018.1.217

Quantitative Finance and Economics

2018, Volume 2, Issue 1: 217-229. doi: 10.3934/QFE.2018.1.217

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Research article Special Issues

A new equilibrium trading model with asymmetric information

1.
School of Mathematics, Jilin University, Changchun, Jilin 130012, China, and School of Mathematical Sciences, Zhejiang University, Hangzhou, Zhejiang 310027, China
2.
GE Global Research, Niskayuna, NY, 12309, USA
3.
Centre for Actuarial Studies, Department of Economics, The University of Melbourne, VIC 3010, Australia

Received: 01 October 2017 Accepted: 15 January 2018 Published: 13 March 2018
JEL Codes: C68

Taking arbitrage opportunities into consideration in an incomplete market, dealers will price bonds based on asymmetric information. The dealer with the best offering price wins the bid. The risk premium in dealer's offering price is primarily determined by the dealer's add-on rate of change to the term structure. To optimize the trading strategy, a new equilibrium trading model is introduced. Optimal sequential estimation scheme for detecting the risk premium due to private inforamtion is proposed based on historical prices, and the best bond pricing formula is given with the according optimal trading strategy. Numerical examples are provided to illustrate the economic insights under the certain stochastic term structure interest rate models.
- stochastic control,
- equilibrium trading,
- asymmetric information,
- incomplete market
Citation: Lianzhang Bao, Guangliang Zhao, Zhuo Jin. A new equilibrium trading model with asymmetric information[J]. Quantitative Finance and Economics, 2018, 2(1): 217-229. doi: 10.3934/QFE.2018.1.217

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Abstract

Taking arbitrage opportunities into consideration in an incomplete market, dealers will price bonds based on asymmetric information. The dealer with the best offering price wins the bid. The risk premium in dealer's offering price is primarily determined by the dealer's add-on rate of change to the term structure. To optimize the trading strategy, a new equilibrium trading model is introduced. Optimal sequential estimation scheme for detecting the risk premium due to private inforamtion is proposed based on historical prices, and the best bond pricing formula is given with the according optimal trading strategy. Numerical examples are provided to illustrate the economic insights under the certain stochastic term structure interest rate models.

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