A One-Factor Conditionally Linear Commodity Pricing Model under Partial Information

Takashi Kato (), Jun Sekine () and Hiromitsu Yamamoto ()

Asia-Pacific Financial Markets, 2014, vol. 21, issue 2, 174 pages

Abstract: A one-factor asset pricing model with an Ornstein–Uhlenbeck process as its state variable is studied under partial information: the mean-reverting level and the mean-reverting speed parameters are modeled as hidden/unobservable stochastic variables. No-arbitrage pricing formulas for derivative securities written on a liquid asset and exponential utility indifference pricing formulas for derivative securities written on an illiquid asset are presented. Moreover, a conditionally linear filtering result is introduced to compute the pricing/hedging formulas and the Bayesian estimators of the hidden variables. Copyright Springer Japan 2014

Keywords: Commodity futures/forward; Conditionally linear model; Partial information; Stochastic convenience yield; Utility indifference pricing; G13; C63 (search for similar items in EconPapers)
Date: 2014
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DOI: 10.1007/s10690-014-9182-y

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