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Equilibrium asset pricing under the Lévy process with stochastic volatility and moment risk premiums

Author

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  • Ruan, Xinfeng
  • Zhu, Wenli
  • Huang, Jiexiang
  • Zhang, Jin E.

Abstract

In this paper, we extend Zhang, Zhao and Chang's (2012) production-based equilibrium asset pricing model from a jump diffusion setting to a Lévy process with stochastic volatility. This paper is a further extension of Fu and Yang (2012), which is under a Lévy process with a constant volatility. Using newly developed closed-form formulas of equity premium and pricing kernel, we are able to price Schouten's (2005) moment swaps analytically. Numerical results show that our pricing formula performs very well. Our model explains Zhao, Zhang and Chang's (2013) empirical observations on moment risk premiums.

Suggested Citation

  • Ruan, Xinfeng & Zhu, Wenli & Huang, Jiexiang & Zhang, Jin E., 2016. "Equilibrium asset pricing under the Lévy process with stochastic volatility and moment risk premiums," Economic Modelling, Elsevier, vol. 54(C), pages 326-338.
    • Handle: RePEc:eee:ecmode:v:54:y:2016:i:c:p:326-338
    DOI: 10.1016/j.econmod.2015.12.030
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    References listed on IDEAS

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    Cited by:

    1. Wenli Zhu & Xinfeng Ruan, 2019. "Pricing Swaps on Discrete Realized Higher Moments Under the Lévy Process," Computational Economics, Springer;Society for Computational Economics, vol. 53(2), pages 507-532, February.
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    4. Ben-zhang Yang & Jia Yue & Nan-jing Huang, 2017. "Variance swaps under L\'{e}vy process with stochastic volatility and stochastic interest rate in incomplete markets," Papers 1712.10105, arXiv.org, revised Mar 2018.
    5. Li, Kaifeng & Xia, Bobo & Guo, Zhaoxuan, 2021. "A consumption-based asset pricing model with disappointment aversion and uncertainty shocks," Economic Modelling, Elsevier, vol. 94(C), pages 235-243.
    6. Slim, Skander & Dahmene, Meriam & Boughrara, Adel, 2020. "How informative are variance risk premium and implied volatility for Value-at-Risk prediction? International evidence," The Quarterly Review of Economics and Finance, Elsevier, vol. 76(C), pages 22-37.
    7. Gong, Xiaoli & Zhuang, Xintian, 2017. "Pricing foreign equity option under stochastic volatility tempered stable Lévy processes," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 483(C), pages 83-93.
    8. Ben-Zhang Yang & Jia Yue & Nan-Jing Huang, 2019. "Equilibrium Price Of Variance Swaps Under Stochastic Volatility With Lévy Jumps And Stochastic Interest Rate," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 22(04), pages 1-33, June.
    9. Liu, Zhangxin (Frank) & Faff, Robert, 2017. "Hitting SKEW for SIX," Economic Modelling, Elsevier, vol. 64(C), pages 449-464.
    10. Ruan, Xinfeng & Zhang, Jin E., 2018. "Equilibrium variance risk premium in a cost-free production economy," Journal of Economic Dynamics and Control, Elsevier, vol. 96(C), pages 42-60.

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