Dynamic Markov bridges motivated by models of insider trading |
| |
Authors: | Luciano Campi Albina Danilova |
| |
Affiliation: | a CEREMADE, University Paris-Dauphine, Franceb Department of Statistics, London School of Economics, United Kingdomc Department of Mathematics, London School of Economics, United Kingdom |
| |
Abstract: | Given a Markovian Brownian martingale Z, we build a process X which is a martingale in its own filtration and satisfies X1=Z1. We call X a dynamic bridge, because its terminal value Z1 is not known in advance. We compute its semimartingale decomposition explicitly under both its own filtration FX and the filtration FX,Z jointly generated by X and Z. Our construction is heavily based on parabolic partial differential equations and filtering techniques. As an application, we explicitly solve an equilibrium model with insider trading that can be viewed as a non-Gaussian generalization of the model of Back and Pedersen (1998) [3], where the insider’s additional information evolves over time. |
| |
Keywords: | 60G44 60H05 60H10 93E11 |
本文献已被 ScienceDirect 等数据库收录! |
|