Information of interest

Dorje Brody and Robyn Friedman

Chapter 5 in Financial Informatics:An Information-Based Approach to Asset Pricing, 2022, pp 107-112 from World Scientific Publishing Co. Pte. Ltd.

Abstract: IN THIS ARTICLE, we present a method of generating interest rate dynamics from elementary economic considerations. There are of course numerous economic factors that affect the movement of interest rates, and causal relations that hold between these factors are often difficult to disentangle. So, rather than attempting to address a range of factors simultaneously, we will focus on one factor important in determining the interest rate term structure, namely the liquidity risk, in the narrow sense of cash demand. The interplay between liquidity and interest rates has long been discussed in economics literature (see, for example, Friedman, 1968). Our objective is to build an information-based model that reflects the market perception of future liquidity risk, and use it for the pricing and general risk management of interest rate derivatives…

Keywords: Financial Mathematics; Mathematical Finance; Financial Markets; Informatics; Asset Pricing; Asset Price Dynamics; Stochastic Modelling; Information Process; Information Flow; Signal Processing; Filtration; Brownian Motion; Brownian Bridge; Change of Measure; Stochastic Volatility; Credit Risk; Default; Equities; Bonds; Collateralized Debt Obligation; Discount Bond; Lévy Process; Lévy Random Bridge; Lévy Information; Gamma Bridge; Markov Bridge; Pricing Kernel; Option Pricing; Informed Traders; Insurance; Reinsurance; Insurance Claims; Bond Portfolio; Heat Kernel; Markov Process; Variance Gamma Process; Ornstein-Uhlenbeck Process; Commodities; Fake News (search for similar items in EconPapers)
JEL-codes: C02 C6 G12 (search for similar items in EconPapers)
Date: 2022
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