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Information of Interest

Author

Listed:
  • Dorje C. Brody

    (Imperial College London)

  • Robyn L. Friedman

    (Imperial College London)

Abstract

A pricing formula for discount bonds, based on the consideration of the market perception of future liquidity risk, is established. An information-based model for liquidity is then introduced, which is used to obtain an expression for the bond price. Analysis of the bond price dynamics shows that the bond volatility is determined by prices of certain weighted perpetual annuities. Pricing formulae for interest rate derivatives are derived.

Suggested Citation

  • Dorje C. Brody & Robyn L. Friedman, 2009. "Information of Interest," Papers 0905.0072, arXiv.org, revised May 2009.
    • Handle: RePEc:arx:papers:0905.0072
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    File URL: http://arxiv.org/pdf/0905.0072
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