Market-making strategy with asymmetric information and regime-switching

Qing-Qing Yang, Wai-Ki Ching, Jia-Wen Gu and Tak Kuen Siu

Journal of Economic Dynamics and Control, 2018, vol. 90, issue C, 408-433

Abstract: An event-triggered regime-switching jump-diffusion model is introduced with a view to incorporating the impact of asymmetric information on optimal trading decisions. The modeling structure is novel in the sense that it can disentangle the optimizing behavior of different types of traders, namely uninformed, partially informed and informed traders. Instead of establishing equilibrium results, all of the three types of traders are supposed to be price takers and determine their optimal trading strategies based on an “exogenously” given mid-price process. It is shown that traders, who have an access to more information about potential market turmoils, such as triggering events, are more aggressive on trading profits which are reflected in higher required liquidity premiums. The informed traders are more cautious in inventory controls through lowering their trading positions prior to the triggering events. With potential regime shifts, the feature of “information delay” about market efficiency is captured by allowing that the security market has a response time for a market shock. It is also shown that traders, who are informed about the information delay, not only gain a higher return, but also a higher level of standard deviation than traders who do not have the information.

Keywords: Triggering events; Asymmetric information; Regime shifts; Optimal market-marking strategies; Information delay (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0165188918301192
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:90:y:2018:i:c:p:408-433

DOI: 10.1016/j.jedc.2018.04.003

Access Statistics for this article

Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

More articles in Journal of Economic Dynamics and Control from Elsevier
Bibliographic data for series maintained by Catherine Liu ().