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Price Discovery In The U.S. Bond Market Trading Strategies And The Cost Of Liquidity, Haimei Shao
Price Discovery In The U.S. Bond Market Trading Strategies And The Cost Of Liquidity, Haimei Shao
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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 …