Economics at your fingertips  

Securities Pricing with Information-Sensitive Discounting

Andrea Macrina and Priyanka Parbhoo ()
Additional contact information
Andrea Macrina: King's College London and Institute of Economic Research, Kyoto University
Priyanka Parbhoo: University of the Witwatersrand

No 695, KIER Working Papers from Kyoto University, Institute of Economic Research

Abstract: In this paper incomplete-information models are developed for the pricing of securities in a stochastic interest rate setting. In particu- lar we consider credit-risky assets that may include random recovery upon default. The market filtration is generated by a collection of information processes associated with economic factors, on which in- terest rates depend, and information processes associated with mar- ket factors used to model the cash flows of the securities. We use information-sensitive pricing kernels to give rise to stochastic interest rates. Semi-analytical expressions for the price of credit-risky bonds are derived, and a number of recovery models are constructed which take into account the perceived state of the economy at the time of default. The price of European-style call bond options is deduced, and it is shown how examples of hybrid securities, like inflation-linked credit-risky bonds, can be valued. Finally, a cumulative information process is employed to develop pricing kernels that respond to the amount of aggregate debt of an economy.

Keywords: Asset pricing; incomplete information; stochastic interest rates; credit risk; recovery models; credit-inflation hybrid securities; information-sensitive pricing kernels (search for similar items in EconPapers)
Pages: 28pages
Date: 2010-01
New Economics Papers: this item is included in nep-ban
References: View references in EconPapers 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 2020-03-29
Handle: RePEc:kyo:wpaper:695