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Density approximations for multivariate affine jump-diffusion processes

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  • Filipović, Damir
  • Mayerhofer, Eberhard
  • Schneider, Paul
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    Abstract

    We introduce closed-form transition density expansions for multivariate affine jump-diffusion processes. The expansions rely on a general approximation theory which we develop in weighted Hilbert spaces for random variables which possess all polynomial moments. We establish parametric conditions which guarantee existence and differentiability of transition densities of affine models and show how they naturally fit into the approximation framework. Empirical applications in option pricing, credit risk, and likelihood inference highlight the usefulness of our expansions. The approximations are extremely fast to evaluate, and they perform very accurately and numerically stable.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Econometrics.

    Volume (Year): 176 (2013)
    Issue (Month): 2 ()
    Pages: 93-111

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    Handle: RePEc:eee:econom:v:176:y:2013:i:2:p:93-111

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    Web page: http://www.elsevier.com/locate/jeconom

    Related research

    Keywords: Affine processes; Asymptotic expansion; Density approximation; Orthogonal polynomials;

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