A mathematical model for the gilt-edged market

Abstract

1.1. The market in British Government stocks in many ways resembles what might be called a perfect market. In particular, very large amounts can be dealt in, dealing expenses are low, powerful statistical techniques are used to identify price anomalies, and frequent switching operations take place to exploit these anomalies. Given these features, prices of stocks will vary in a highly regular manner, and it should be possible, by the application of graduation methods, to represent the price structure in mathematical terms. If such a descriptive framework can be developed solely from the principle that prices are in equilibrium under the switching action of all participants in the market, it will provide the basis for a mathematical model that could be used for many functions of portfolio management.