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Pricing Fixed-Income Securities in an Information-Based Framework

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Author Info

  • Lane P. Hughston

    ()
    (Department of Mathematics, Imperial College)

  • Andrea Macrina

    ()
    (Department of Mathematics, King's College London, Institute of Economic Research, Kyoto University)

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    Abstract

    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.

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    File URL: http://www.kier.kyoto-u.ac.jp/DP/DP692.pdf
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    Bibliographic Info

    Paper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 692.

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    Length: 20pages
    Date of creation: Jan 2010
    Date of revision:
    Handle: RePEc:kyo:wpaper:692

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    Related research

    Keywords: Fixed-income securities; interest rate theory; inflation; inflation-linked securities; non-linear filtering; incomplete information;

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    Cited by:
    1. 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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