Generalized Transform Analysis of Affine Processes and Applications in Finance
AbstractNonlinearity is an important consideration in many problems of finance and economics, such as pricing securities and solving equilibrium models. This article provides analytical treatment of a general class of nonlinear transforms for processes with tractable conditional characteristic functions. We extend existing results on characteristic function-based transforms to a substantially wider class of nonlinear functions while maintaining low dimensionality by avoiding the need to compute the density function. We illustrate the applications of the generalized transform in pricing defaultable bonds with stochastic recovery. We also use the method to analytically solve a class of general equilibrium models with multiple goods and apply this model to study the effects of time-varying labor income risk on the equity premium. The Author 2012. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: firstname.lastname@example.org., Oxford University Press.
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Bibliographic InfoArticle provided by Society for Financial Studies in its journal The Review of Financial Studies.
Volume (Year): 25 (2012)
Issue (Month): 7 ()
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Other versions of this item:
- Hui Chen & Scott Joslin, 2011. "Generalized Transform Analysis of Affine Processes and Applications in Finance," NBER Working Papers 16906, National Bureau of Economic Research, Inc.
- C5 - Mathematical and Quantitative Methods - - Econometric Modeling
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
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