Journal article

A new equilibrium trading model with asymmetric information

Lianzhang Bao, Guangliang Zhao, Zhuo Jin

Quantitative Finance and Economics | AIMS Press | Published : 2018

Abstract

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 s..

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University of Melbourne Researchers

Grants

Awarded by Research Grants Council of the Hong Kong Special Administrative Region


Funding Acknowledgements

We are grateful to the anonymous referees for his/her valuable comments and suggestions. We are also grateful to the late Dr. Dunmu Ji for his insight and valuable contributions. We also thank Prof. George Yin for the comments and suggestions. The research of Lianzhang Bao was supported by China Postdoctoral Science Foundation. The research of Zhuo Jin was supported in part by Research Grants Council of the Hong Kong Special Administrative Region (project No. HKU 17330816).