Financial Modelling with Forward-looking Information

An Intuitive Approach to Asset Pricing

verfasst von: Nadi Serhan Aydın

Verlag: Springer International Publishing

Buchreihe : Contributions to Management Science

Enthalten in: Springer Professional "Wirtschaft+Technik" , Springer Professional "Technik" , Springer Professional "Wirtschaft"

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Über dieses Buch

This book focuses on modelling financial information flows and information-based asset pricing framework. After introducing the fundamental properties of the framework, it presents a short information-theoretic perspective with a view to quantifying the information content of financial signals, and links the present framework with the literature on asymmetric information and market microstructure by means of a dynamic, bipartite, heterogeneous agent network. Numerical and explicit analyses shed light on the effects of differential information and information acquisition on the allocation of profit and loss as well as the pace of fundamental price discovery. The dynamic programming method is used to seek an optimal strategy for utilizing superior information. Lastly, the book features an implementation of the present framework using real-world financial data.

Inhaltsverzeichnis

Frontmatter

Chapter 1. Introduction

Abstract

The raison d’être of the markets we study is to support information-based trading. Yet, there is a fundamental conflict between how efficiently markets spread information and the incentives to acquire it. This is something conventional stochastic models and, particularly, the way their information content is structured tend to oversimplify. As such, the notion that “there is a universal market filtration” also seems to be unrealistic. What counts, for market efficiency, is that, in practice, investors have access to different levels of information and with varying ease. This calls for a broader view of market efficiency which takes into account the amount and pace of such access. Nevertheless, by exchanging information through highly frequent trades, market participants are able to maintain a law of reasonable price range, if not a law of one price.

Nadi Serhan Aydın

Chapter 2. The Signal-Based Framework

Abstract

This chapter, assembles some fundamental properties of random bridge processes and justifies their use in modelling forwardlooking financial information. Although this chapter is essentially based on Brody et al. (Int J Theor Appl Financ 11(1):107–142, 2008), Brody et al. (Beyond hazard rates: a new framework for credit-risk modelling. Birkhäuser, Boston, 2007) and Brody et al. (Proc Math Phys Eng Sci 464(2095):1801–1822, 2008), it contributes to the existing literature by recovering the necessary properties of the signal-based framework in a much greater detail, and presenting a useful information-theoretic analysis to quantify the information component.

Nadi Serhan Aydın

Chapter 3. A Signal-Based Heterogeneous Agent Network

Abstract

This chapter introduces an interactive market setup where agents receive variegated information. This chapter, which is inspired by the remarks of authors in Brody et al. (Modelling information flows in financial markets, Springer, Berlin, 2011), is a significant addition to the literature on equilibrium with long-lived information. It not only vividly illustrates some interesting price discovery dynamics in the presence of heterogeneous information through numerical analysis, but also explores optimal strategies to exploit differential information by analytically characterising ex-ante gains from trade.

Nadi Serhan Aydın

Chapter 4. Putting Signal-Based Model to Work

Abstract

This chapter puts the signal-based framework to practical use by introducing a slightly modified version of the signal process and making a particular choice for real-time signals. To the best of the authors knowledge, this is the first such attempt, with results having significant implications for harnessing the signal-based framework in a real-world setting. We also contribute the literature by presenting a crisp formula for the signal-based price.

Nadi Serhan Aydın

Chapter 5. Conclusion

Abstract

This chapter concludes with a brief outlook, and some remarks on the contemporary area of Financial Signal Processing (FSP).

Nadi Serhan Aydın

Backmatter

Titel: Financial Modelling with Forward-looking Information
verfasst von: Nadi Serhan Aydın
Verlag: Springer International Publishing
Electronic ISBN: 978-3-319-57147-8
Print ISBN: 978-3-319-57146-1
DOI: https://doi.org/10.1007/978-3-319-57147-8