UCL logo

UCL Discovery

UCL home » Library Services » Electronic resources » UCL Discovery

Markov-Modulated Information Flows

Hoyle, E; Macrina, A; Mengütürk, LA; (2017) Markov-Modulated Information Flows. ArXiv , Article arXiv:1708.06948. (In press). Gold open access

[img] Text
Macrina_MMIF-2017AUG23.pdf - ["content_typename_Accepted version" not defined]
Access restricted to UCL open access staff until 7 June 2019.

Download (425kB)

Abstract

We model information flows in continuous time that are generated by a number of information sources that are switched on and off at random times. In a novel approach, we explicitly relate the discovery of relevant new information sources to jumps in the conditional expectation process of a partially observed signal. We derive the resulting endogenous jump-diffusion, and show that it is a solution to the stochastic filtering problem associated with the Markov-modulated multivariate information process. We give a Feynman-Ka\'c representation for the endogenous jump-diffusion, and produce an explicit expression for the size of the jumps. The jump-size distribution is a function of a weighted sum of those information processes that are activated at the jump time. The proposed approach can be applied broadly in signal processing, and an example in Mathematical Finance is provided. We consider a vanilla option and find that its Merton-type price can be expressed by a weighted sum of vanilla prices based on the possible combinations of active information processes at option maturity. The constructed information-flow models lend themselves to the quantification of informational advantage in a competition where agents have asymmetric information flows.

Type: Article
Title: Markov-Modulated Information Flows
Open access status: An open access publication
Publisher version: https://arxiv.org/abs/1708.06948
Language: English
Keywords: Filtration, information flow model, information process, stochastic filtering, Markov chain, jump-diffusion, information-based modelling, asymmetric information, asset pricing
UCL classification: UCL > Provost and Vice Provost Offices
UCL > Provost and Vice Provost Offices > UCL BEAMS
UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Maths and Physical Sciences
UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Maths and Physical Sciences > Dept of Mathematics
URI: http://discovery.ucl.ac.uk/id/eprint/10063706
Downloads since deposit
0Downloads
Download activity - last month
Download activity - last 12 months
Downloads by country - last 12 months

Archive Staff Only

View Item View Item