@article{TEXTUAL,
      recid = {11608},
      author = {Bhattacharya, Ayan},
      title = {Informational Updates and the Derivative Pricing Kernel},
      journal = {AppliedMath},
      address = {2024-01-03},
      number = {TEXTUAL},
      abstract = {It is common in financial markets for market makers to  offer prices on derivative instruments even though they are  uncertain about the underlying asset’s value. This paper  studies the mathematical problem that arises as a result.  Derivatives are priced in the risk-neutral framework, so as  the market maker acquires more information about the  underlying asset, the change of measure for transition to  the risk-neutral framework (the pricing kernel) evolves.  This evolution takes a precise form when the market maker  is Bayesian. It is shown that Bayesian updates can be  characterized as additional informational drift in the  underlying asset’s stochastic process. With Bayesian  updates, the change of measure needed for pricing  derivatives is two-fold: the first change is from the prior  probability measure to the posterior probability measure,  and the second change is from the posterior probability  measure to the risk-neutral measure. The relation between  the regular pricing kernel and the pricing kernel under  this two-fold change of measure is characterized.},
      url = {http://knowledge.uchicago.edu/record/11608},
}