Advanced Search
MyIDEAS: Login

Asset Pricing with Second-Order Esscher Transforms

Contents:

Author Info

  • Alain MONFORT

    (Crest)

  • Fulvio PEGORARO

    (Crest)

Abstract

The purpose of the paper is to introduce, in the class of discrete time no-arbitrage asset pricing models, awider bridge between the historical and the risk-neutral state vector dynamics and to preserve, at the same time,its tractability and °exibility. This goal is achieved by introducing the notion of Exponential-Quadratic stochasticdiscount factor (SDF) or, equivalently, the notion of Second-Order Esscher Transform. Then, focusing on securitymarket models, this approach is developed in three important multivariate stochastic frameworks: the conditionallyGaussian framework, the conditionally Mixed-Normal and the conditionally Gaussian Switching Regimes framework.In the conditionally multivariate Gaussian case, our approach determines a risk-neutral mean as a function of(the short rate and of) the risk-neutral variance-covariance matrix which is di®erent from the historical one. Theconditionally mixed-normal Gaussian case provides a ¯rst generalization of the Gaussian setting, in which the risk-neutral variance-covariance matrices and mixing weights of all components (in the ¯nite mixture) can be di®erentfrom the historical ones. The Gaussian switching regime case introduces further °exibility given the serial dependenceof regimes and the introduction of the regime indicator function in the exponential-quadratic SDF. We also developswitching regime models which include (in the factor's conditional mean and conditional variance) additive impactsof the present and past regimes and we stress their interpretation in terms of general "discrete-time jump-di®usion"models in which the risk included in the ¯rst and second moment of jumps is priced.Even if we focus on security market models, we do not make any particular assumption about the state vectorand therefore this appr

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.crest.fr/images/doctravail/2010-54.pdf
File Function: Crest working paper version
Download Restriction: no

Bibliographic Info

Paper provided by Centre de Recherche en Economie et Statistique in its series Working Papers with number 2010-54.

as in new window
Length: 33
Date of creation: 2010
Date of revision:
Handle: RePEc:crs:wpaper:2010-54

Contact details of provider:
Postal: 15 Boulevard Gabriel Peri 92245 Malakoff Cedex
Phone: 01 41 17 60 81
Web page: http://www.crest.fr
More information through EDIRC

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
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.:
as in new window
  1. Peter Christoffersen & Redouane Elkamhi & Bruno Feunou & Kris Jacobs, 2010. "Option Valuation with Conditional Heteroskedasticity and Nonnormality," Review of Financial Studies, Society for Financial Studies, vol. 23(5), pages 2139-2183.
  2. Markus Leippold & Liuren Wu, 2002. "Asset Pricing Under The Quadratic Class," Finance 0207015, EconWPA.
  3. Alain MONFORT & Fulvio PEGORARO, 2010. "Asset Pricing with Second-Order Esscher Transforms," Working Papers 2010-54, Centre de Recherche en Economie et Statistique.
  4. Alain Monfort & Fulvio Pegoraro, 2007. "Switching VARMA Term Structure Models - Extended Version," Working Papers 2007-19, Centre de Recherche en Economie et Statistique.
  5. Gurdip Bakshi & Dilip Madan, 2006. "A Theory of Volatility Spreads," Management Science, INFORMS, vol. 52(12), pages 1945-1956, December.
  6. Stutzer, Michael, 1995. "A Bayesian approach to diagnosis of asset pricing models," Journal of Econometrics, Elsevier, vol. 68(2), pages 367-397, August.
  7. Engle, Robert F. & Mustafa, Chowdhury, 1992. "Implied ARCH models from options prices," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 289-311.
  8. Garcia, Rene & Renault, Eric & Semenov, Andrei, 2006. "Disentangling risk aversion and intertemporal substitution through a reference level," Finance Research Letters, Elsevier, vol. 3(3), pages 181-193, September.
  9. Chapman, David A, 1997. " Approximating the Asset Pricing Kernel," Journal of Finance, American Finance Association, vol. 52(4), pages 1383-1410, September.
  10. H. Bertholon & A. Monfort & F. Pegoraro, 2008. "Econometric Asset Pricing Modelling," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 6(4), pages 407-458, Fall.
  11. Joan Jasiak & R. Sufana & C. Gourieroux, 2005. "The Wishart Autoregressive Process of Multivariate Stochastic Volatility," Working Papers 2005_2, York University, Department of Economics.
  12. Ravi Bansal & Amir Yaron, 2000. "Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles," NBER Working Papers 8059, National Bureau of Economic Research, Inc.
  13. Rosenberg, Joshua V. & Engle, Robert F., 2002. "Empirical pricing kernels," Journal of Financial Economics, Elsevier, vol. 64(3), pages 341-372, June.
  14. Serge Darolles & Christian Gourieroux & Joann Jasiak, 2006. "Structural Laplace Transform and Compound Autoregressive Models," Journal of Time Series Analysis, Wiley Blackwell, vol. 27(4), pages 477-503, 07.
  15. Bonomo, Marco & Garcia, René & Meddahi, Nour & Tédongap, Roméo, 2010. "Generalized Disappointment Aversion, Long Run Volatility Risk and Asset Prices," TSE Working Papers 10-187, Toulouse School of Economics (TSE).
  16. Jin-Chuan Duan & Jean-Guy Simonato, 1998. "Empirical Martingale Simulation for Asset Prices," Management Science, INFORMS, vol. 44(9), pages 1218-1233, September.
  17. Amin, Kaushik I & Ng, Victor K, 1993. " Option Valuation with Systematic Stochastic Volatility," Journal of Finance, American Finance Association, vol. 48(3), pages 881-910, July.
  18. John Y. Campbell & John Cochrane, 1999. "Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Journal of Political Economy, University of Chicago Press, vol. 107(2), pages 205-251, April.
  19. Brennan, M J, 1979. "The Pricing of Contingent Claims in Discrete Time Models," Journal of Finance, American Finance Association, vol. 34(1), pages 53-68, March.
  20. Bertholon, H. & Monfort, A. & Pegoraro, F., 2007. "Pricing and Inference with Mixtures of Conditionally Normal Processes," Working papers 188, Banque de France.
  21. John Y. Campbell & John H. Cochrane, 1994. "By force of habit: a consumption-based explanation of aggregate stock market behavior," Working Papers 94-17, Federal Reserve Bank of Philadelphia.
  22. Bernard Dumas & Alexander Kurshev & Raman Uppal, 2007. "Equilibrium Portfolio Strategies in the Presence of Sentiment Risk and Excess Volatility," NBER Working Papers 13401, National Bureau of Economic Research, Inc.
  23. Lars Peter Hansen & John C. Heaton & Nan Li, 2008. "Consumption Strikes Back? Measuring Long-Run Risk," Journal of Political Economy, University of Chicago Press, vol. 116(2), pages 260-302, 04.
  24. Jin-Chuan Duan, 1995. "The Garch Option Pricing Model," Mathematical Finance, Wiley Blackwell, vol. 5(1), pages 13-32.
  25. Epstein, Larry G & Zin, Stanley E, 1989. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework," Econometrica, Econometric Society, vol. 57(4), pages 937-69, July.
  26. Christian Gourieroux & Alain Monfort & Vassilis Polimenis, 2005. "Affine Model for Credit Risk Analysis," Working Papers 2005-44, Centre de Recherche en Economie et Statistique.
  27. António Câmara, 2003. "A Generalization of the Brennan-Rubinstein Approach for the Pricing of Derivatives," Journal of Finance, American Finance Association, vol. 58(2), pages 805-820, 04.
  28. Peng Cheng & Olivier Scaillet, 2007. "Linear-Quadratic Jump-Diffusion Modeling," Mathematical Finance, Wiley Blackwell, vol. 17(4), pages 575-598.
  29. Gourieroux, C. & Monfort, A., 2007. "Econometric specification of stochastic discount factor models," Journal of Econometrics, Elsevier, vol. 136(2), pages 509-530, February.
  30. Hansen, Lars Peter & Heaton, John & Lee, Junghoon & Roussanov, Nikolai, 2007. "Intertemporal Substitution and Risk Aversion," Handbook of Econometrics, in: J.J. Heckman & E.E. Leamer (ed.), Handbook of Econometrics, edition 1, volume 6, chapter 61 Elsevier.
  31. 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.
  32. Gourieroux, Christian & Sufana, Razvan, 2010. "Derivative Pricing With Wishart Multivariate Stochastic Volatility," Journal of Business & Economic Statistics, American Statistical Association, vol. 28(3), pages 438-451.
  33. 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.
  34. Heston, Steven L & Nandi, Saikat, 2000. "A Closed-Form GARCH Option Valuation Model," Review of Financial Studies, Society for Financial Studies, vol. 13(3), pages 585-625.
  35. Peter Christoffersen & Kris Jacobs, 2004. "Which GARCH Model for Option Valuation?," Management Science, INFORMS, vol. 50(9), pages 1204-1221, September.
  36. Andrea Buraschi & Paolo Porchia & Fabio Trojani, 2010. "Correlation Risk and Optimal Portfolio Choice," Journal of Finance, American Finance Association, vol. 65(1), pages 393-420, 02.
  37. Alain Monfort & Fulvio Pegoraro, 2007. "Switching VARMA Term Structure Models," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 5(1), pages 105-153.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Monfort, Alain & Pegoraro, Fulvio, 2012. "Asset pricing with Second-Order Esscher Transforms," Journal of Banking & Finance, Elsevier, vol. 36(6), pages 1678-1687.
  2. Alexandru Badescu & Robert J. Elliott & Juan-Pablo Ortega, 2012. "Quadratic hedging schemes for non-Gaussian GARCH models," Papers 1209.5976, arXiv.org, revised Dec 2013.
  3. Fengler, Matthias & Hin, Lin-Yee, 2011. "Semi-nonparametric estimation of the call price surface under strike and time-to-expiry no-arbitrage constraints," Economics Working Paper Series 1136, University of St. Gallen, School of Economics and Political Science, revised May 2013.
  4. Matthias Fengler & Helmut Herwartz & Christian Werner, 2010. "A dynamic copula approach to recovering the index implied volatility skew," University of St. Gallen Department of Economics working paper series 2010 1132, Department of Economics, University of St. Gallen, revised Nov 2011.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:crs:wpaper:2010-54. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Florian Sallaberry).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.