Pricing Fixed-Income Securities in an Information-Based Framework
AbstractIn 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.
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Bibliographic InfoPaper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 692.
Date of creation: Jan 2010
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Fixed-income securities; interest rate theory; inflation; inflation-linked securities; non-linear filtering; incomplete information;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-01-23 (All new papers)
- NEP-CBA-2010-01-23 (Central Banking)
- NEP-FMK-2010-01-23 (Financial Markets)
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- Gabriele Sarais & Damiano Brigo, 2014. "Inflation securities valuation with macroeconomic-based no-arbitrage dynamics," Papers 1403.7799, arXiv.org, revised Jul 2014.
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