eprintid: 1376524
rev_number: 44
eprint_status: archive
userid: 608
dir: disk0/01/37/65/24
datestamp: 2012-11-30 10:25:26
lastmod: 2020-02-12 18:17:45
status_changed: 2012-11-30 10:25:26
type: article
metadata_visibility: show
item_issues_count: 0
creators_name: Macrina, A
creators_name: Parbhoo, PA
title: Randomised mixture models for pricing kernels
ispublished: pub
divisions: UCL
divisions: A01
divisions: B04
divisions: C06
divisions: F59
keywords: Pricing kernel, asset pricing, interest rates, yield curve, randomised mixtures, Lévy processes, Esscher martingales, weighted heat kernel, Markov processes
note: This article is distributed under the terms of the Creative Commons Attribution License which permits any use, distribution, and reproduction in any medium, provided the original author(s) and the source are credited.
abstract: Numerous kinds of uncertainties may affect an economy, e.g. economic, political, and en- vironmental ones. We model the aggregate impact by the uncertainties on an economy and its associated financial market by randomised mixtures of Lévy processes. We assume that mar- ket participants observe the randomised mixtures only through best estimates based on noisy market information. The concept of incomplete information introduces an element of stochastic filtering theory in constructing what we term “filtered Esscher martingales”. We make use of this family of martingales to develop pricing kernel models. Examples of bond price models are examined, and we show that the choice of the random mixture has a significant effect on the model dynamics and the types of movements observed in the associated yield curves. Parameter sensitivity is analysed and option price processes are derived. We extend the class of pricing kernel models by considering a weighted heat kernel approach, and develop models driven by mixtures of Markov processes.
date: 2014-05-09
official_url: http://dx.doi.org/10.1007/s10690-014-9186-7
vfaculties: VMPS
oa_status: green
full_text_type: pub
language: eng
primo: open
primo_central: open_green
article_type_text: Article
verified: verified_manual
elements_source: Manually entered
elements_id: 829308
doi: 10.1007/s10690-014-9186-7
lyricists_name: Macrina, Andrea
lyricists_id: AMACR82
full_text_status: public
publication: Asia-Pacific Financial Markets
volume: 2
number: 4
pagerange: 281-315
pages: 34
citation:        Macrina, A;    Parbhoo, PA;      (2014)    Randomised mixture models for pricing kernels.                   Asia-Pacific Financial Markets , 2  (4)   pp. 281-315.    10.1007/s10690-014-9186-7 <https://doi.org/10.1007/s10690-014-9186-7>.       Green open access   
 
document_url: https://discovery.ucl.ac.uk/id/eprint/1376524/1/art_10.1007_s10690-014-9186-7.pdf