Pricing Corporate Securities under Noisy Asset Information

DefaultRisk.com the web's biggest credit risk modeling resource.

Submit Your Paper

Post Your Résumé

For Recruiters

Today's Featured Book

A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation
by Richard Bookstaber, John Wiley & Sons, April 17, 2007, Hardcover, 288 pages

Training Discounted for DefaultRisk.com visitors only:

The Mathematics of Credit Derivatives: The Essential Credit Modelling and Pricing Companion
by Philipp J. Schönbucher,
WBS Training, August 2003, DVD / Interactive CD-ROM

Sponsor:
Shop at Amazon.com and support DefaultRisk.com

Pricing Corporate Securities under Noisy Asset Information

by Rüdiger Frey of the University of Leipzig, and
Thorsten Schmidt of the University of Leipzig

May 7, 2007

Abstract: This paper considers the pricing of corporate securities of a given firm, in particular equity, when investors do not have full information on the firm's asset value. We show that under noisy asset information, the pricing of corporate securities leads to a nonlinear filtering problem. This problem is solved by a Markov chain approximation, leading to an efficient finite-dimensional approximative filter for the asset value. We discuss several applications and illustrate our results with a simulation study.

Keywords: Firm value models, incomplete information, nonlinear filtering.

Books Referenced in this Paper: (what is this?)