Information of Interest
Pricing of Securities
2010-05-24 v2
Abstract
A pricing formula for discount bonds, based on the consideration of the market perception of future liquidity risk, is established. An information-based model for liquidity is then introduced, which is used to obtain an expression for the bond price. Analysis of the bond price dynamics shows that the bond volatility is determined by prices of certain weighted perpetual annuities. Pricing formulae for interest rate derivatives are derived.
Keywords
Cite
@article{arxiv.0905.0072,
title = {Information of Interest},
author = {Dorje C. Brody and Robyn L. Friedman},
journal= {arXiv preprint arXiv:0905.0072},
year = {2010}
}
Comments
12 pages, 3 figures