A One-Factor Conditionally Linear Commodity Pricing Model under Partial Information
- Resource Type
- Working Paper
- Authors
- Kato, Takashi; Sekine, Jun; Yamamoto, Hiromitsu
- Source
- Asia-Pacific Financial Markets, May 2014, Volume 21, Issue 2, pp 151-174
- Subject
- Quantitative Finance - Pricing of Securities
Quantitative Finance - Mathematical Finance
91G20, 60J70, 93C41
- Language
A one-factor asset pricing model with an Ornstein--Uhlenbeck process as its state variable is studied under partial information: the mean-reverting level and the mean-reverting speed parameters are modeled as hidden/unobservable stochastic variables. No-arbitrage pricing formulas for derivative securities written on a liquid asset and exponential utility indifference pricing formulas for derivative securities written on an illiquid asset are presented. Moreover, a conditionally linear filtering result is introduced to compute the pricing/hedging formulas and the Bayesian estimators of the hidden variables.
Comment: 21 pages