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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

Special Issues: Computational Finance and Insurance

Taking arbitrage opportunities into consideration in an incomplete market, dealers will pricebonds based on asymmetric information. The dealer with the best offering price wins the bid. The riskpremium in dealer’s offering price is primarily determined by the dealer’s add-on rate of change tothe 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 isproposed based on historical prices, and the best bond pricing formula is given with the accordingoptimal trading strategy. Numerical examples are provided to illustrate the economic insights underthe certain stochastic term structure interest rate models.
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© 2018 the Author(s), licensee AIMS Press. This is an open access article distributed under the terms of the Creative Commons Attribution Licese (http://creativecommons.org/licenses/by/4.0)

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