PRICING CORPORATE SECURITIES UNDER NOISY ASSET INFORMATION

Rüdiger Frey and Thorsten Schmidt

Mathematical Finance, 2009, vol. 19, issue 3, 403-421

Abstract: This paper considers the pricing of corporate securities of a given firm, in particular equity, when investors do not have full information on the firm's asset value. We show that under noisy asset information, the pricing of corporate securities leads to a nonlinear filtering problem. This problem is solved by a Markov chain approximation, leading to an efficient finite‐dimensional approximative filter for the asset value. We discuss several applications and illustrate our results with a simulation study.

Date: 2009
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