Economics at your fingertips  

Lévy Random Bridges and the Modelling of Financial Information

Edward Hoyle (), Lane Hughston () and Andrea Macrina ()
Additional contact information
Edward Hoyle: Department of Mathematics, Imperial College
Lane Hughston: Department of Mathematics, Imperial College
Andrea Macrina: Department of Mathematics, King's College London, Institute of Economic Research, Kyoto University

No 693, KIER Working Papers from Kyoto University, Institute of Economic Research

Abstract: The information-based asset-pricing framework of Brody, Hughston and Mac- rina (BHM) is extended to include a wider class of models for market information. In the BHM framework, each asset is associated with a collection of random cash flows. The price of the asset is the sum of the discounted conditional expecta- tions of the cash flows. The conditional expectations are taken with respect to a ¯ltration generated by a set of 'information processes'. The information pro- cesses carry imperfect information about the cash flows. To model the flow of information, we introduce in this paper a class of processes which we term Levy random bridges (LRBs). This class generalises the Brownian bridge and gamma bridge information processes considered by BHM. An LRB is defined over a finite time horizon. Conditioned on its terminal value, an LRB is identical in law to a Levy bridge. We consider in detail the case where the asset generates a single cash flow XT occurring at a fixed date T. The flow of market information about XT is modelled by an LRB terminating at the date T with the property that the (random) terminal value of the LRB is equal to XT . An explicit expression for the price process of such an asset is found by working out the discounted conditional expectation of XT with respect to the natural filtration of the LRB. The prices of European options on such an asset are calculated.

Pages: 32pages
Date: 2010-01
References: View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link) (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Access Statistics for this paper

More papers in KIER Working Papers from Kyoto University, Institute of Economic Research Contact information at EDIRC.
Bibliographic data for series maintained by Ryo Okui (). This e-mail address is bad, please contact .

Page updated 2020-03-30
Handle: RePEc:kyo:wpaper:693