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A new framework for asset pricing based on modelling the informationavailable to market participants is presented. Each asset is characterised bythe cash flows it generates. Each cash flow is expressed as a function of oneor more independent random variables called market factors or "X-factors". EachX-factor is associated with a "market information process", the values of whichbecome available to market participants. In addition to true information aboutthe X-factor, the information process contains an independent "noise" termmodelled here by a Brownian bridge. The information process thus gives partialinformation about the X-factor, and the value of the market factor is onlyrevealed at the termination of the process. The market filtration is assumed tobe generated by the information processes associated with the X-factors. Theprice of an asset is given by the risk-neutral expectation of the sum of thediscounted cash flows, conditional on the information available from thefiltration. The theory is developed in some detail, with a variety ofapplications to credit risk management, share prices, interest rates, andinflation. A number of new exactly solvable models are obtained for the priceprocesses of various types of assets and derivative securities; and a novelmechanism is proposed to account for the dynamics of stochastic volatility anddynamic correlation. A discrete-time version of the information-based frameworkis also developed, and is used to construct a new class of models for the realand nominal interest rate term structures, and the dynamics of the associatedprice index.

An Information-Based Framework for Asset Pricing: X-Factor Theory and its Applications