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International Money and Stock Market Contingent Claims

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  • Christian Gourieroux

    (Crest)

  • Alain Monfort

    (Crest)

  • Razvan Sufana

    (Crest)

Abstract

We develop a unified approach with closed-form solutions for pricing bonds, stocks,currencies and their derivatives. The specification assumes a fundamental risk factorrepresented by a stochastic positive definite matrix following a Wishart autoregressive(WAR) process. By assuming a volatility-in-mean specification for the domestic stockreturns and the relative changes of the exchange rates, and a domestic stochastic discountfactor exponential affine with respect to the fundamental risk, it is possible to deriveclosed form solutions for the term structures of interest rates and for the risk neutralprobabilities. In particular:i) The domestic and foreign termstructures are jointly affine and correspond toWishartquadratic term structures, which can ensure the positivity of interest rates;ii) In this framework where the stock price follows a model with stochastic volatilitywe obtain explicit or quasi-explicit formulas for futures and forward contracts, swaps andoptions; this extends results by Heston (1993) and Ball, Roma (1994).

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Bibliographic Info

Paper provided by Centre de Recherche en Economie et Statistique in its series Working Papers with number 2005-41.

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Length: 47
Date of creation: 2005
Date of revision:
Handle: RePEc:crs:wpaper:2005-41

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Cited by:
  1. Henri Bertholon & Alain Monfort & Fulvio Pegoraro, 2007. "Econometric Asset Pricing Modelling," Working Papers 2007-18, Centre de Recherche en Economie et Statistique.
  2. Alessandro Gnoatto & Martino Grasselli, 2011. "The explicit Laplace transform for the Wishart process," Papers 1107.2748, arXiv.org, revised Aug 2013.
  3. Gourieroux, Christian & Sufana, Razvan, 2011. "Discrete time Wishart term structure models," Journal of Economic Dynamics and Control, Elsevier, vol. 35(6), pages 815-824, June.
  4. Gourieroux, C. & Monfort, A., 2013. "Linear-price term structure models," Journal of Empirical Finance, Elsevier, vol. 24(C), pages 24-41.

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