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Pricing and Inference with Mixtures of Conditionally Normal Processes

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Author Info
Bertholon, H.
Monfort, A.
Pegoraro, F.

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Abstract

We consider the problems of derivative pricing and inference when the stochastic discount factor has an exponential-affine form and the geometric return of the underlying asset has a dynamics characterized by a mixture of conditionally Normal processes. We consider both the static case in which the underlying process is a white noise distributed as a mixture of Gaussian distributions (including extreme risks and jump diffusions) and the dynamic case in which the underlying process is conditionally distributed as a mixture of Gaussian laws. Semi-parametric, non parametric and Switching Regime situations are also considered. In all cases, the risk-neutral processes and explicit pricing formulas are obtained.

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Paper provided by Banque de France in its series Documents de Travail with number 188.

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Length: 55 pages
Date of creation: 2007
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Handle: RePEc:bfr:banfra:188

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Keywords: Derivative Pricing ; Stochastic Discount Factor ; Implied Volatility; Mixture of Normal Distributions ; Mixture of Conditionally Normal Processes ; Nonparametric Kernel Estimation ; Mixed-Normal GARCH Processes ; Switching Regime Models.;

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Find related papers by JEL classification:
C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General
C5 - Mathematical and Quantitative Methods - - Econometric Modeling
G1 - Financial Economics - - General Financial Markets

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. León, Ángel & Mencía, Javier & Sentana, Enrique, 2005. "Parametric Properties of Semi-Nonparametric Distributions, With Applications to Option Valuation," CEPR Discussion Papers 5435, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  2. Bertholon, H. & Monfort, A. & Pegoraro, F., 2008. "Econometric Asset Pricing Modelling," Documents de Travail 223, Banque de France. [Downloadable!]
    Other versions:
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