Liquidity-Risk-Premium Free Price Models of Government Bonds and Currency Forwards in Persistently Informed Markets

27 Pages Posted: 26 Sep 2016 Last revised: 2 Jan 2017

See all articles by Aryo Sasongko

Aryo Sasongko

Bank Indonesia, Monetary Management Department

Cynthia Afriani

Universitas Indonesia, Graduate School of Management

Buddi Wibowo

University of Indonesia (UI) - Faculty of Economics and Business

Zaäfri A. Husodo

Universitas Indonesia, Graduate School of Management

Date Written: January 2, 2017

Abstract

Previous researchers, such as: Fleming and Remolona (1999) and Li et al. (2009), accounted some dealers having private information. On contrary, this study begins with introducing a situation in government bonds and currency forwards markets where all participants always have commonly shared information and make distinct expectations. The circumstance requires that market maker map dealers' expectations. Fluctuating price expectations expose market makers to order flow imbalances and liquidity measures' variations. Later, we develop liquid price models to improve existing liquidity-risk-premium free price models of government bonds and currency forwards and an objective function of liquidity-risk-premium free term structure.

Keywords: Asymmetric selection cost, Inventory holding cost, Bid-ask spread, Trading volume, Trading frequency, Liquidity innovation

JEL Classification: G12, G14

Suggested Citation

Sasongko, Aryo and Afriani, Cynthia and Wibowo, Buddi and Husodo, Zaäfri A., Liquidity-Risk-Premium Free Price Models of Government Bonds and Currency Forwards in Persistently Informed Markets (January 2, 2017). Available at SSRN: https://ssrn.com/abstract=2842534 or http://dx.doi.org/10.2139/ssrn.2842534

Aryo Sasongko (Contact Author)

Bank Indonesia, Monetary Management Department ( email )

JL. M.H. Thamrin No. 2
Jakarta, 10350
Indonesia
+622129814034 (Phone)

HOME PAGE: http://www.bi.go.id/en/

Cynthia Afriani

Universitas Indonesia, Graduate School of Management ( email )

Depok, West Java 16424
Indonesia

Buddi Wibowo

University of Indonesia (UI) - Faculty of Economics and Business ( email )

Kampus Baru
Depok, West Java 16424
Indonesia
0216508160 (Phone)

Zaäfri A. Husodo

Universitas Indonesia, Graduate School of Management ( email )

Depok, West Java 16424
Indonesia

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