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Asset Pricing in a Two-Country Discontinuous General Equilibrium Model

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Author Info
Ciprian Necula (Faculty of Finance and Banking, Bucharest University of Economics)

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Abstract

The aim of this paper is to develop a framework for asset pricing in a continuous time general equilibrium model for a two country Lucas type economy. The model assumes that the output in the two countries follows a jump-diffusion stochastic process characterized by constant growth rates and volatilities and by log-normal amplitude of the jumps. Using this specification we deduce the fundamental evaluation equations for financial assets as well as a formula for the price of exchange rate options in this economy.

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File URL: http://www.dofin.ase.ro/carfib/wpaefr/wpaefr_24.pdf
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File Function: First version, 2008
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Publisher Info
Paper provided by Bucharest University of Economics, Center for Advanced Research in Finance and Banking - CARFIB in its series Advances in Economic and Financial Research - DOFIN Working Paper Series with number 24.

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Date of creation: Dec 2008
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Handle: RePEc:cab:wpaefr:24

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Web page: http://www.dofin.ase.ro/carfib/
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Related research
Keywords: general equilibrium model; two-country Lucas economy; exchange rate; risk premium; jump-diffusion;

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Find related papers by JEL classification:
C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
C61 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Optimization Techniques; Programming Models; Dynamic Analysis
D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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  1. Ciprian Necula, 2008. "A Two-Country Discontinuous General Equilibrium Model," Advances in Economic and Financial Research - DOFIN Working Paper Series 23, Bucharest University of Economics, Center for Advanced Research in Finance and Banking - CARFIB. [Downloadable!]
  2. Breeden, Douglas T., 1979. "An intertemporal asset pricing model with stochastic consumption and investment opportunities," Journal of Financial Economics, Elsevier, vol. 7(3), pages 265-296, September. [Downloadable!] (restricted)
  3. Merton, Robert C, 1973. "An Intertemporal Capital Asset Pricing Model," Econometrica, Econometric Society, vol. 41(5), pages 867-87, September. [Downloadable!] (restricted)
  4. Detemple, Jerome B & Selden, Larry, 1991. "A General Equilibrium Analysis of Option and Stock Market Interactions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(2), pages 279-303, May. [Downloadable!] (restricted)
  5. Breeden, Douglas T., 1986. "Consumption, production, inflation and interest rates : A synthesis," Journal of Financial Economics, Elsevier, vol. 16(1), pages 3-39, May. [Downloadable!] (restricted)
  6. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 53(2), pages 385-407, March. [Downloadable!] (restricted)
  7. Bick, Avi, 1987. "On the Consistency of the Black-Scholes Model with a General Equilibrium Framework," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(03), pages 259-275, September. [Downloadable!]
  8. Bailey, Warren & Stulz, Ren? M., 1989. "The Pricing of Stock Index Options in a General Equilibrium Model," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(01), pages 1-12, March. [Downloadable!]
  9. Bakshi, Gurdip S & Chen, Zhiwu, 1997. " Equilibrium Valuation of Foreign Exchange Claims," Journal of Finance, American Finance Association, vol. 52(2), pages 799-826, June. [Downloadable!] (restricted)
  10. Breeden, Douglas T & Litzenberger, Robert H, 1978. "Prices of State-contingent Claims Implicit in Option Prices," Journal of Business, University of Chicago Press, vol. 51(4), pages 621-51, October. [Downloadable!] (restricted)
  11. Bakshi, Gurdip S. & Zhiwu, Chen, 1997. "An alternative valuation model for contingent claims," Journal of Financial Economics, Elsevier, vol. 44(1), pages 123-165, April. [Downloadable!] (restricted)
  12. Merton, Robert C., 1976. "Option pricing when underlying stock returns are discontinuous," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 125-144. [Downloadable!] (restricted)
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  13. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June. [Downloadable!] (restricted)
  14. Bakshi, Gurdip & Cao, Charles & Chen, Zhiwu, 1997. " Empirical Performance of Alternative Option Pricing Models," Journal of Finance, American Finance Association, vol. 52(5), pages 2003-49, December. [Downloadable!] (restricted)
  15. Charles Quanwei Cao & Gurdip S. Bakshi & Zhiwu Chen, 1997. "Empirical Performance of Alternative Option Pricing Models," Yale School of Management Working Papers ysm54, Yale School of Management. [Downloadable!]
  16. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "An Intertemporal General Equilibrium Model of Asset Prices," Econometrica, Econometric Society, vol. 53(2), pages 363-84, March. [Downloadable!] (restricted)
  17. Charles Quanwei Cao & Gurdip S. Bakshi & Zhiwu Chen, 1997. "Empirical Performance of Alternative Option Pricing Models," Yale School of Management Working Papers ysm65, Yale School of Management. [Downloadable!]
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