IDEAS home Printed from https://ideas.repec.org/p/kyo/wpaper/693.html
   My bibliography  Save this paper

Lévy Random Bridges and the Modelling of Financial Information

Author

Listed:
  • Edward Hoyle

    () (Department of Mathematics, Imperial College)

  • Lane P. Hughston

    () (Department of Mathematics, Imperial College)

  • Andrea Macrina

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

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.

Suggested Citation

  • Edward Hoyle & Lane P. Hughston & Andrea Macrina, 2010. "Lévy Random Bridges and the Modelling of Financial Information," KIER Working Papers 693, Kyoto University, Institute of Economic Research.
  • Handle: RePEc:kyo:wpaper:693
    as

    Download full text from publisher

    File URL: http://www.kier.kyoto-u.ac.jp/DP/DP693.pdf
    Download Restriction: no

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kyo:wpaper:693. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ryo Okui). General contact details of provider: http://edirc.repec.org/data/iekyojp.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.