Research article Special Issues

A new equilibrium trading model with asymmetric information

  • 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.

    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

    Related Papers:

  • 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.


    加载中
    [1] Black F, Scholes M (1973) The pricing of options and corporate liabilities. J Political Economy 81: 637–659. doi: 10.1086/260062
    [2] Black F, Cox J (1976) Valuing corporate securities: Some e ects of bond indenture provisions. J Financ 31: 351–367. doi: 10.1111/j.1540-6261.1976.tb01891.x
    [3] Brennan M, Schwartz E (1977) Savings bonds, retractable bonds, and callable bonds. J Financ Econo 3: 133–155.
    [4] Brigo D, Mercurio F (2007) Interest rate models-theory and practice: with smile, inflation and credit. Springer Science & Business Media.
    [5] Chan K, Karolyi G, Longsta F, et al. (1992) An empirical comparison of alternative models of the short-term interest rate. J Financ 47: 1209–1227. doi: 10.1111/j.1540-6261.1992.tb04011.x
    [6] Chang G, Sundaresan S, Asset prices and default-free term structure in an equilibrium model of default, SSRN, 1999. Available from: https://papers.ssrn.com/sol3/papers.cfm?abstract id=222790.
    [7] Cox J, Ingersoll J (1985) A theory of the term structure of interest rates. Econometrica 53: 385–407. doi: 10.2307/1911242
    [8] Cox J, Ingersoll J, Ross S (1980) An analysis of variable rate loan contracts. J Financ 35: 389–403. doi: 10.1111/j.1540-6261.1980.tb02169.x
    [9] Cox J, Ross S (1976) The valuation of options for alternative stochastic processes. J Financ Econ 3: 145–166. doi: 10.1016/0304-405X(76)90023-4
    [10] Dothan U (1978) On the term structure of interest rates. J Financ Econ 6: 59–69. doi: 10.1016/0304-405X(78)90020-X
    [11] Duffie D, FlemingW, Soner H (1997) Hedging in incomplete markets with HARA utility. J Econ Dyn Control 21: 753–782. doi: 10.1016/S0165-1889(97)00002-X
    [12] Duffie D, Kan R (1996) A yield-factor model of interest rates. Math Financ 6: 379–406. doi: 10.1111/j.1467-9965.1996.tb00123.x
    [13] Duffie D, Lando D (2001) Term structure of credit spreads with incomplete accounting information. Econometrica 69: 633–664. doi: 10.1111/1468-0262.00208
    [14] Fleming W, Rishel R (1975) Deterministic and Stochastic Optimal Control, Springer-Verlag, New York.
    [15] Fleming W, Stein J (2004) Stochastic optimal control, international finance and debt. J Bank Financ 28: 979–996. doi: 10.1016/S0378-4266(03)00138-9
    [16] Gao J (2008) Stochastic optimal control of DC pension funds. Insur Math Econ 42: 1159–1164. doi: 10.1016/j.insmatheco.2008.03.004
    [17] Heath D, Jarrow R, Morton A (1992) Bond pricing and the term structure of interest rates: a new methodology for contingent claims valuation. Econometrica 60: 77–105. doi: 10.2307/2951677
    [18] Ho T, Lee S (1986) Term structure moments and pricing interest rate contingent claims. J Financ 41: 1011–1029. doi: 10.1111/j.1540-6261.1986.tb02528.x
    [19] Hull J, White A (1990) Pricing interest-rate derivative securities. RFS 3: 573–592.
    [20] Ji D, Yin G (1993) Weak convergence of term structure movements and the connection of prices and interest rates. Stochastic Anal Appl 11: 61–76. doi: 10.1080/07362999308809302
    [21] Karoui N, QuenezM(1995) Dynamic programming and pricing of contingent claims in an incomplete market. SIAM J Control Optim 33: 29–66.
    [22] Korn R, Kraft H (2002) A stochastic control approach to portfolio problems with stochastic interest rates. SIAM J Control Optim 40: 1250–1269. doi: 10.1137/S0363012900377791
    [23] Liptser R, Shiryayev A (1974) Statistics of Random Processes, Springer-Verlag, New York.
    [24] Litterman R, Scheinkman J (1991) Common Factors Affecting Bond Returns. J Fixed Income 3: 54–61.
    [25] Madan D, Unal H (2000) A Two-factor hazard rate model for pricing risky debt and the term structure of credit spreads. J Financ Quant Anal 35: 43–65. doi: 10.2307/2676238
    [26] Subrahmanyam M (1996) The Term structure of interest rates: alternative approaches and their implications for the valuation of contingent claims. GENEVA PAPERS Risk Insurance Theory, 21: 7–28. doi: 10.1007/BF00949048
    [27] Taksar M, Zhou X (1998) Optimal risk and dividend control for a company with a debt liability. Insur Math Econ 22: 105–122. doi: 10.1016/S0167-6687(98)00012-2
    [28] Vasicek O (1977) An equilibrium characterization of the term structure, J Finan Econom 5: 177–188.
    [29] Vecer J (2001) A new PDE approach for pricing arithmetic average Asian options, J Comput Financ 4: 105–113.
    [30] Zhou C (2001) The term structure of credit spreads with jump risk. J Bank Financ 25: 2015–2040. doi: 10.1016/S0378-4266(00)00168-0
  • Reader Comments
  • © 2018 the Author(s), licensee AIMS Press. This is an open access article distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/4.0)
通讯作者: 陈斌, bchen63@163.com
  • 1. 

    沈阳化工大学材料科学与工程学院 沈阳 110142

  1. 本站搜索
  2. 百度学术搜索
  3. 万方数据库搜索
  4. CNKI搜索

Metrics

Article views(1276) PDF downloads(905) Cited by(3)

Article outline

Figures and Tables

Figures(4)

Other Articles By Authors

/

DownLoad:  Full-Size Img  PowerPoint
Return
Return

Catalog