Pricing Fixed-Income Securities in an Information-Based Framework
Lane Hughston () and
Andrea Macrina ()
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Lane Hughston: Department of Mathematics, Imperial College
Andrea Macrina: Department of Mathematics, King's College London, Institute of Economic Research, Kyoto University
No 692, KIER Working Papers from Kyoto University, Institute of Economic Research
In this paper we introduce a class of information-based models for the pricing of fixed-income securities. We consider a set of continuous- time information processes that describe the flow of information about market factors in a monetary economy. The nominal pricing kernel is at any given time assumed to be given by a function of the values of information processes at that time. By use of a change-of-measure technique we derive explicit expressions for the price processes of nom- inal discount bonds, and deduce the associated dynamics of the short rate of interest and the market price of risk. The interest rate positiv- ity condition is expressed as a differential inequality. We proceed to the modelling of the price-level, which at any given time is also taken to be a function of the values of the information processes at that time. A simple model for a stochastic monetary economy is introduced in which the prices of nominal discount bonds and inflation-linked notes can be expressed in terms of aggregate consumption and the liquidity benefit generated by the money supply.
Keywords: Fixed-income securities; interest rate theory; inflation; inflation-linked securities; non-linear filtering; incomplete information (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:kyo:wpaper:692
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