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

Takashi Kato, Jun Sekine and Hiromitsu Yamamoto

Papers from arXiv.org

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.

Date: 2014-06
New Economics Papers: this item is included in nep-ecm and nep-upt
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Published in Asia-Pacific Financial Markets, May 2014, Volume 21, Issue 2, pp 151-174

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