Securities Pricing with Information-Sensitive Discounting
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.
|Date of creation:||Jan 2010|
|Date of revision:|
|Contact details of provider:|| Postal: Yoshida-Honmachi, Sakyo-ku, Kyoto 606-8501|
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- L. C. G. Rogers, 1997. "The Potential Approach to the Term Structure of Interest Rates and Foreign Exchange Rates," Mathematical Finance, Wiley Blackwell, vol. 7(2), pages 157-176.
- Jirô Akahori & Andrea Macrina, 2012.
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- Hinnerich, Mia, 2008. "Inflation-indexed swaps and swaptions," Journal of Banking & Finance, Elsevier, vol. 32(11), pages 2293-2306, November.
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