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Equilibrium Pricing in the Presence of Cumulative Dividends Following a Diffusion

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  • Knut K. Aase

Abstract

The paper presents some security market pricing results in the setting of a security market equilibrium in continuous time. The theme of the paper is financial valuation theory when the primitive assets pay out real dividends represented by processes of unbounded variation. In continuous time, when the models are also continuous, this is the most general representation of real dividends, and it can be of practical interest to analyze such models. Taking as the starting point an extension to continuous time of the Lucas consumption-based model, we derive the equilibrium short-term interest rate, present a new derivation of the consumption-based capital asset pricing model, demonstrate how equilibrium forward and futures prices can be derived, including several examples, and finally we derive the equilibrium price of a European call option in a situation where the underlying asset pays dividends according to an Itô process of unbounded variation. In the latter case we demonstrate how this pricing formula simplifies to known results in special cases, among them the famous Black-Scholes formula and the Merton formula for a special dividend rate process. Copyright 2002 Blackwell Publishing, Inc..

Suggested Citation

  • Knut K. Aase, 2002. "Equilibrium Pricing in the Presence of Cumulative Dividends Following a Diffusion," Mathematical Finance, Wiley Blackwell, vol. 12(3), pages 173-198.
  • Handle: RePEc:bla:mathfi:v:12:y:2002:i:3:p:173-198
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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/1467-9965.02006
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    Citations

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    Cited by:

    1. Aase, Knut K., 2004. "Jump Dynamics: The Equity Premium and the Risk-Free Rate Puzzles," Discussion Papers 2004/12, Norwegian School of Economics, Department of Business and Management Science.
    2. Aase, Knut K, 2005. "Using Option Pricing Theory to Infer About Historical Equity Premiums," University of California at Los Angeles, Anderson Graduate School of Management qt3dd602j5, Anderson Graduate School of Management, UCLA.
    3. Aase, Knut K, 2005. "The perpetual American put option for jump-diffusions with applications," University of California at Los Angeles, Anderson Graduate School of Management qt31g898nz, Anderson Graduate School of Management, UCLA.
    4. Aase, Knut K., 2004. "The perpetual American put option for jump-diffusions: Implications for equity premiums," Discussion Papers 2004/19, Norwegian School of Economics, Department of Business and Management Science.
    5. Aase, Knut K., 2004. "Negative volatility and the Survival of Western Financial Markets," Discussion Papers 2004/5, Norwegian School of Economics, Department of Business and Management Science.
    6. Knut K. Aase, 2008. "On The Consistency Of The Lucas Pricing Formula," Mathematical Finance, Wiley Blackwell, vol. 18(2), pages 293-303.
    7. Bjørn Eraker & Ivan Shaliastovich, 2008. "An Equilibrium Guide To Designing Affine Pricing Models," Mathematical Finance, Wiley Blackwell, vol. 18(4), pages 519-543.
    8. Aase, Knut K., 2000. "An equilibrium asset pricing model based on Lévy processes: relations to stochastic volatility, and the survival hypothesis," Insurance: Mathematics and Economics, Elsevier, vol. 27(3), pages 345-363, December.
    9. Lars Nielsen, 2007. "Dividends in the theory of derivative securities pricing," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 31(3), pages 447-471, June.
    10. Masaaki Kijima & Akihisa Tamura, 2014. "Buhlmann’s Economic Premium Principle in The Presence of Transaction Costs," KIER Working Papers 893, Kyoto University, Institute of Economic Research.
    11. Aase, Knut K., 2005. "Using Option Pricing Theory to Infer About Equity Premiums," Discussion Papers 2005/11, Norwegian School of Economics, Department of Business and Management Science.
    12. Aase, Knut K. & Lillestøl, Jostein, 2015. "Beyond the local mean-variance analysis in continuous time: The problem of non-normality," Discussion Papers 2015/11, Norwegian School of Economics, Department of Business and Management Science.

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