Pricing with Variance Gamma Information
Abstract
In the informationbased pricing framework of Brody, Hughston and Macrina, the market filtration $\{ \mathcal F_t\}_{t\geq 0}$ is generated by an information process $\{ \xi_t\}_{t\geq0}$ defined in such a way that at some fixed time $T$ an $\mathcal F_T$measurable random variable $X_T$ is "revealed". A cash flow $H_T$ is taken to depend on the market factor $X_T$, and one considers the valuation of a financial asset that delivers $H_T$ at $T$. The value $S_t$ of the asset at any time $t\in[0,T)$ is the discounted conditional expectation of $H_T$ with respect to $\mathcal F_t$, where the expectation is under the risk neutral measure and the interest rate is constant. Then $S_{T^} = H_T$, and $S_t = 0$ for $t\geq T$. In the general situation one has a countable number of cash flows, and each cash flow can depend on a vector of market factors, each associated with an information process. In the present work, we construct a new class of models for the market filtration based on the variancegamma process. The information process is obtained by subordinating a particular type of Brownian random bridge with a gamma process. The filtration is taken to be generated by the information process together with the gamma bridge associated with the gamma subordinator. We show that the resulting extended information process has the Markov property and hence can be used to price a variety of different financial assets, several examples of which are discussed in detail.
 Publication:

arXiv eprints
 Pub Date:
 March 2020
 arXiv:
 arXiv:2003.07967
 Bibcode:
 2020arXiv200307967H
 Keywords:

 Quantitative Finance  Mathematical Finance;
 Mathematics  Probability
 EPrint:
 24 pages, 4 figures, to appear in Risks