University of Surrey

Test tubes in the lab Research in the ATI Dance Research

Pricing of Defaultable Bonds with Random Information Flow

Brody, Dorje and Law, Yan Tai (2015) Pricing of Defaultable Bonds with Random Information Flow Applied Mathematical Finance, 22 (5). pp. 399-420.

[img]
Preview
Text
Fulltext.pdf

Download (1MB) | Preview

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.

Item Type: Article
Divisions : Faculty of Engineering and Physical Sciences > Mathematics
Authors :
NameEmailORCID
Brody, Dorjed.brody@surrey.ac.uk
Law, Yan Tai
Date : 1 April 2015
DOI : 10.1080/1350486X.2015.1050151
Copyright Disclaimer : copyright Brody 2015
Uncontrolled Keywords : Information-based asset pricing; stochastic volatility; price manipulation
Depositing User : Claudio Svaluto
Date Deposited : 18 Sep 2018 13:50
Last Modified : 18 Sep 2018 13:50
URI: http://epubs.surrey.ac.uk/id/eprint/849336

Actions (login required)

View Item View Item

Downloads

Downloads per month over past year


Information about this web site

© The University of Surrey, Guildford, Surrey, GU2 7XH, United Kingdom.
+44 (0)1483 300800