Securities Pricing with Information-Sensitive Discounting
AbstractIn 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.
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Bibliographic InfoPaper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 695.
Date of creation: Jan 2010
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Asset pricing; incomplete information; stochastic interest rates; credit risk; recovery models; credit-inflation hybrid securities; information-sensitive pricing kernels;
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