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Multifrequency Jump-Diffusions: An Equilibrium Approach

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Author Info
Laurent E. Calvet
Adlai J. Fisher

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Abstract

This paper proposes that equilibrium valuation is a powerful method to generate endogenous jumps in asset prices, which provides a structural alternative to traditional reduced-form specifications with exogenous discontinuities. We specify an economy with continuous consumption and dividend paths, in which endogenous price jumps originate from the market impact of regime-switches in the drifts and volatilities of fundamentals. We parsimoniously incorporate shocks of heterogeneous durations in consumption and dividends while keeping constant the number of parameters. Equilibrium valuation creates an endogenous relation between a shock's persistence and the magnitude of the induced price jump. As the number of frequencies driving fundamentals goes to infinity, the price process converges to a novel stochastic process, which we call a multifractal jump-diffusion.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12797.

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Date of creation: Dec 2006
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Handle: RePEc:nbr:nberwo:12797

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Find related papers by JEL classification:
C5 - Mathematical and Quantitative Methods - - Econometric Modeling
D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
G0 - Financial Economics - - General
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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