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Dynamic Markov bridges motivated by models of insider trading

Campi, Luciano, Cetin, Umut and Danilova, Albina (2011) Dynamic Markov bridges motivated by models of insider trading. Stochastic Processes and Their Applications, 121 (3). pp. 534-567. ISSN 0304-4149

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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 View the MathML source and the filtration View the MathML source 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.

Item Type: Article
Official URL: http://www.elsevier.com/wps/find/journaldescriptio...
Additional Information: © 2010 Elsevier
Library of Congress subject classification: H Social Sciences > HA Statistics
H Social Sciences > HG Finance
Sets: Departments > Mathematics
Departments > Statistics
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 21 Jan 2011 16:53
URL: http://eprints.lse.ac.uk/31538/

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