Pricing Corporate Securities Under Noisy Asset Information

19 Pages Posted: 30 Jun 2009

Date Written: 2007-11

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.

Suggested Citation

Frey, Rüdiger and Schmidt, Thorsten, Pricing Corporate Securities Under Noisy Asset Information (2007-11). Mathematical Finance, Vol. 19, Issue 3, pp. 403-421, July 2009, Available at SSRN: https://ssrn.com/abstract=1426631 or http://dx.doi.org/10.1111/j.1467-9965.2009.00374.x

Rüdiger Frey (Contact Author)

ETH Zürich ( email )

ETH-Zentrum
CH-8092 Zurich
Switzerland
0041 1 63 26526 (Phone)
0041 1 63 21085 (Fax)

Thorsten Schmidt

University of Freiburg ( email )

Fahnenbergplatz
Freiburg, D-79085
Germany

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