Lévy random bridges and the modelling of financial information

Edward Hoylea, Lane P. Hughston and Andrea Macrina

Chapter 7 in Financial Informatics:An Information-Based Approach to Asset Pricing, 2022, pp 127-155 from World Scientific Publishing Co. Pte. Ltd.

Abstract: The information–based asset–pricing framework of Brody–Hughston–Macrina (BHM) is extended to include a wider class of models for market information. To model the information flow, we introduce a class of processes called Lévy random bridges (LRBs), generalising the Brownian bridge and gamma bridge information processes of BHM. Given its terminal value at T, an LRB has the law of a Lévy bridge. We consider an asset that generates a cash–flow XT at T. The information about XT is modelled by an LRB with terminal value XT . The price process of the asset is worked out, along with the prices of options. © 2010 Elsevier B.V. All rights reserved.

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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