A filtered no arbitrage model for the term structures from noisy data

Abstract We consider the problem of pricing in financial markets when agents do not have access to full information. The particular problem concerns the pricing of non traded or illiquid bonds on the basis of the observations of the yields of traded zero-coupon bonds. The approach being used gives an example of how stochastic filtering techniques, in particular the Kalman filter, can be usefully applied to pricing under incomplete information.