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Multifrequency jump-diffusions: An equilibrium approach

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  • Calvet, Laurent E.
  • Fisher, Adlai J.

Abstract

This paper proposes that equilibrium valuation is a powerful method to generate endogenous jumps in asset prices. 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 regimes of heterogeneous durations and verify that the persistence of a shock endogenously increases 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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  • Calvet, Laurent E. & Fisher, Adlai J., 2008. "Multifrequency jump-diffusions: An equilibrium approach," Journal of Mathematical Economics, Elsevier, vol. 44(2), pages 207-226, January.
  • Handle: RePEc:eee:mateco:v:44:y:2008:i:2:p:207-226
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    Cited by:

    1. Guidolin, Massimo & Timmermann, Allan, 2007. "Asset allocation under multivariate regime switching," Journal of Economic Dynamics and Control, Elsevier, pages 3503-3544.
    2. Hervé Crès & Tobias Markeprand & Mich Tvede, 2009. "Incomplete Financial Markets and Jumps in Asset Prices," Discussion Papers 09-12, University of Copenhagen. Department of Economics.
    3. Jaroslav Borovička & Mark Hendricks & José A. Scheinkman, 2011. "Risk-Price Dynamics," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 9(1), pages 3-65, Winter.
      • Jaroslav Borovička & Lars Peter Hansen & Mark Hendricks & José A. Scheinkman, 2009. "Risk Price Dynamics," NBER Working Papers 15506, National Bureau of Economic Research, Inc.
      • Lars Peter Hansen & Jaroslav BoroviÄ ka & Mark Hendricks & José A. Scheinkman, 2010. "Risk Price Dynamics," Working Papers 2010-004, Becker Friedman Institute for Research In Economics.
      • Jaroslav Borovicka & Lars Peter Hansen & Mark Hendricks & Jose A. Scheinkman, 2009. "Risk Price Dynamics," Working Papers 1393, Princeton University, Department of Economics, Econometric Research Program..
    4. Calvet, Laurent E. & Fearnley, Marcus & Fisher, Adlai J. & Leippold, Markus, 2015. "What is beneath the surface? Option pricing with multifrequency latent states," Journal of Econometrics, Elsevier, vol. 187(2), pages 498-511.
    5. Hervé Crès & Tobias Markeprand & Mich Tvede, 2016. "Incomplete financial markets and jumps in asset prices," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 62(1), pages 201-219, June.
    6. repec:pri:metric:wp033_2012_hansen_borovicka_hendricks_scheinkman_risk%20price%20dynamics. is not listed on IDEAS
    7. Immonen, Eero, 2017. "Simple agent-based dynamical system models for efficient financial markets: Theory and examples," Journal of Mathematical Economics, Elsevier, vol. 69(C), pages 38-53.
    8. Bekaert, Geert & Engstrom, Eric & Ermolov, Andrey, 2015. "Bad environments, good environments: A non-Gaussian asymmetric volatility model," Journal of Econometrics, Elsevier, vol. 186(1), pages 258-275.

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    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; Trading Volume; Bond Interest Rates

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