In this paper we introduce a class of information-based models for thepricing of fixed-income securities. We consider a set of continuous- timeinformation processes that describe the flow of information about marketfactors in a monetary economy. The nominal pricing kernel is at any given timeassumed to be given by a function of the values of information processes atthat time. By use of a change-of-measure technique we derive explicitexpressions for the price processes of nominal discount bonds, and deduce theassociated dynamics of the short rate of interest and the market price of risk.The interest rate positivity condition is expressed as a differentialinequality. We proceed to the modelling of the price-level, which at any giventime is also taken to be a function of the values of the information processesat that time. A simple model for a stochastic monetary economy is introduced inwhich the prices of nominal discount bonds and inflation-linked notes can beexpressed in terms of aggregate consumption and the liquidity benefit generatedby the money supply.
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