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Stochastic Deflator for an Economic Scenario Generator with Five Factors

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  • Po-Keng Cheng

    (SAF)

  • Fr'ed'eric Planchet

    (SAF)

Abstract

In this paper, we implement a stochastic deflator with five economic and financial risk factors: interest rates, market price of risk, stock prices, default intensities, and convenience yields. We examine the deflator with different financial assets, such as stocks, zero-coupon bonds, vanilla options, and corporate coupon bonds. We find required regularity conditions to implement our stochastic deflator. Our numerical results show the reliability of the deflator approach in pricing financial derivatives.

Suggested Citation

  • Po-Keng Cheng & Fr'ed'eric Planchet, 2018. "Stochastic Deflator for an Economic Scenario Generator with Five Factors," Papers 1806.02991, arXiv.org, revised Feb 2019.
    • Handle: RePEc:arx:papers:1806.02991
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