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Equilibruim approach of asset pricing under Lévy process

  • Fu, Jun
  • Yang, Hailiang
Registered author(s):

    This work considers the equilibrium approach of asset pricing for Lévy process. It derives the equity premium and pricing kernel analytically for the stock price process, obtains an equilibrium option pricing formula, and explains some empirical evidence such as the negative variance risk premium, implied volatility smirk, and negative skewness risk premium by comparing the physical and risk-neutral distributions of the log return. Different from most of the current studies in equilibrium pricing under jump diffusion models, this work models the underlying asset price as the exponential of a Lévy process and thus allows nearly an arbitrage distribution of the jump component.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0377221712004924
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    Article provided by Elsevier in its journal European Journal of Operational Research.

    Volume (Year): 223 (2012)
    Issue (Month): 3 ()
    Pages: 701-708

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    Handle: RePEc:eee:ejores:v:223:y:2012:i:3:p:701-708
    Contact details of provider: Web page: http://www.elsevier.com/locate/eor

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