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http://bura.brunel.ac.uk/handle/2438/11081
Title: | Pricing of defaultable bonds with random information flow |
Authors: | Brody, DC Law, YT |
Keywords: | Information-based asset pricing;Stochastic volatility;Price manipulation |
Issue Date: | 2015 |
Publisher: | Routledge |
Citation: | Applied Mathematical Finance, (12 June 2015) |
Abstract: | In the information-based approach to asset pricing, the market filtration is modelled explicitly as a superposition of signals concerning relevant market factors and independent noise. The rate at which the signal is revealed to the market then determines the overall magnitude of asset volatility. By letting this information flow rate random, we obtain an elementary stochastic volatility model within the information-based approach. Such an extension is justified on account of the fact that in real markets information flow rates are rarely measurable. Effects of having a random information flow rate are investigated in detail in the context of a simple model setup. Specifically, the price process of an elementary defaultable bond is derived, and its characteristic behaviours are revealed via simulation studies. The price of a European-style option on the bond is worked out, showing that the model has a sufficient flexibility to fit volatility surface. As an extension of the random information flow model, modelling of price manipulation is considered. A simple model is used to show how the skewness of the manipulated and unmanipulated price processes take opposite signature. |
URI: | http://www.tandfonline.com/doi/full/10.1080/1350486X.2015.1050151#.VZJyOTZwZ9A http://bura.brunel.ac.uk/handle/2438/11081 |
DOI: | http://dx.doi.org/10.1080/1350486X.2015.1050151 |
ISSN: | 1350-486X 1466-4313 |
Appears in Collections: | Dept of Mathematics Research Papers |
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