Information of interest

The flow of information in financial markets on future liquidity risk generates the rise and fall of demand for default-free bonds. Here, Dorje Brody and Robyn Friedman present an approach to pricing these bonds and the associated derivatives, based on noisy information about the possible future liquidity crises, while deriving option pricing formulas and showing the impact of liquidity on the risk premium

In this article, we present a method of generating interest rate dynamics from elementary economic considerations. There are of course numerous economic factors that affect the movement of interest rates, and causal relations that hold between these factors are often difficult to disentangle. So, rather than attempting to address a range of factors simultaneously, we will focus on one factor important in determining the interest rate term structure, namely the liquidity risk, in the narrow sense

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