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PRICE DISCOVERY IN THE U.S. BOND MARKETS: TRADING STRATEGIES AND THE COST OF LIQUIDITY

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Date Issued:
2011
Abstract/Description:
The world bond market is nearly twice as large as the equity market. The goal of this dissertation is to study the dynamics of bond price. Among the liquidity risk, interest rate risk and default risk, this dissertation will focus on the liquidity risk and trading strategy. Under the mathematical frame of stochastic control, we model price setting in U.S. bond markets where dealers have multiple instruments to smooth inventory imbalances. The difficulty in obtaining the optimal trading strategy is that the optimal strategy and value function depend on each other, and the corresponding HJB equation is nonlinear. To solve this problem, we derived an approximate optimal explicit trading strategy. The result shows that this trading strategy is better than the benchmark central symmetric trading strategy.
Title: PRICE DISCOVERY IN THE U.S. BOND MARKETS: TRADING STRATEGIES AND THE COST OF LIQUIDITY.
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Name(s): Shao, Haimei, Author
Yong, Jiongmin, Committee Chair
University of Central Florida, Degree Grantor
Type of Resource: text
Date Issued: 2011
Publisher: University of Central Florida
Language(s): English
Abstract/Description: The world bond market is nearly twice as large as the equity market. The goal of this dissertation is to study the dynamics of bond price. Among the liquidity risk, interest rate risk and default risk, this dissertation will focus on the liquidity risk and trading strategy. Under the mathematical frame of stochastic control, we model price setting in U.S. bond markets where dealers have multiple instruments to smooth inventory imbalances. The difficulty in obtaining the optimal trading strategy is that the optimal strategy and value function depend on each other, and the corresponding HJB equation is nonlinear. To solve this problem, we derived an approximate optimal explicit trading strategy. The result shows that this trading strategy is better than the benchmark central symmetric trading strategy.
Identifier: CFE0003633 (IID), ucf:48858 (fedora)
Note(s): 2011-05-01
Ph.D.
Sciences, Department of Mathematics
Masters
This record was generated from author submitted information.
Subject(s): Stochastic Control
HJB equation
Compound Possion Process
Over-the-counter Market
Bond Trading Strategy
The Cost of Liquidity
Persistent Link to This Record: http://purl.flvc.org/ucf/fd/CFE0003633
Restrictions on Access: public
Host Institution: UCF

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