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Generalized Transform Analysis of Affine Processes and Applications in Finance

Author

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  • Hui Chen
  • Scott Joslin

Abstract

Nonlinearity is an important consideration in many problems of finance and economics, such as pricing securities, computing equilibrium, and conducting structural estimations. We extend the transform analysis in Duffie, Pan, and Singleton (2000) by providing analytical treatment of a general class of nonlinear transforms for processes with tractable conditional characteristic functions. We illustrate the applications of the generalized transform method in pricing contingent claims and solving general equilibrium models with preference shocks, heterogeneous agents, or multiple goods. We also apply the method to a model of time-varying labor income risk and study the implications of stochastic covariance between labor income and dividends for the dynamics of the risk premiums on financial wealth and human capital.

Suggested Citation

  • Hui Chen & Scott Joslin, 2011. "Generalized Transform Analysis of Affine Processes and Applications in Finance," NBER Working Papers 16906, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:16906
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    Cited by:

    1. Georgy Chabakauri, 2012. "Asset Pricing with Heterogeneous Investors and Portfolio Constraints," FMG Discussion Papers dp707, Financial Markets Group.
    2. Ovidiu Costin & Michael B. Gordy & Min Huang & Pawel J. Szerszen, 2016. "Expectations Of Functions Of Stochastic Time With Application To Credit Risk Modeling," Mathematical Finance, Wiley Blackwell, vol. 26(4), pages 748-784, October.
    3. Filipović, Damir & Mayerhofer, Eberhard & Schneider, Paul, 2013. "Density approximations for multivariate affine jump-diffusion processes," Journal of Econometrics, Elsevier, vol. 176(2), pages 93-111.
    4. Matyas Barczy & Leif Doering & Zenghu Li & Gyula Pap, 2013. "Stationarity and ergodicity for an affine two factor model," Papers 1302.2534, arXiv.org, revised Sep 2013.
    5. Damien Ackerer & Damir Filipovic & Sergio Pulido, 2017. "The Jacobi Stochastic Volatility Model," Working Papers hal-01338330, HAL.
    6. Jaroslava Hlouskova & Leopold Sogner, 2015. "GMM Estimation of Affine Term Structure Models," Papers 1508.01661, arXiv.org.
    7. Ian Martin, 2013. "The Lucas Orchard," Econometrica, Econometric Society, vol. 81(1), pages 55-111, January.
    8. Satoshi Yamashita & Toshinao Yoshiba, 2010. "Analytical Solution for Expected Loss of a Collateralized Loan: A Square-root Intensity Process Negatively Correlated with Collateral Value," IMES Discussion Paper Series 10-E-10, Institute for Monetary and Economic Studies, Bank of Japan.
    9. Fermanian, Jean-David, 2014. "The limits of granularity adjustments," Journal of Banking & Finance, Elsevier, vol. 45(C), pages 9-25.
    10. Jean-David Fermanian, 2013. "The Limits of Granularity Adjustments," Working Papers 2013-27, Center for Research in Economics and Statistics.
    11. Roussanov, Nikolai, 2014. "Composition of wealth, conditioning information, and the cross-section of stock returns," Journal of Financial Economics, Elsevier, vol. 111(2), pages 352-380.
    12. Buss, Adrian & Uppal, Raman & Vilkov, Grigory, 2014. "Asset prices in general equilibrium with recursive utility and illiquidity induced by transactions costs," SAFE Working Paper Series 41, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    13. Matyas Barczy & Leif Doering & Zenghu Li & Gyula Pap, 2013. "Parameter estimation for a subcritical affine two factor model," Papers 1302.3451, arXiv.org, revised Apr 2014.
    14. Matyas Barczy & Leif Doering & Zenghu Li & Gyula Pap, 2012. "On parameter estimation for critical affine processes," Papers 1210.1866, arXiv.org, revised Mar 2013.
    15. Eraker, Bjørn & Wang, Jiakou, 2015. "A non-linear dynamic model of the variance risk premium," Journal of Econometrics, Elsevier, vol. 187(2), pages 547-556.
    16. Damien Ackerer & Damir Filipovi'c & Sergio Pulido, 2016. "The Jacobi Stochastic Volatility Model," Papers 1605.07099, arXiv.org, revised Mar 2018.
    17. Matyas Barczy & Gyula Pap, 2013. "Asymptotic properties of maximum likelihood estimators for Heston models based on continuous time observations," Papers 1310.4783, arXiv.org, revised Jun 2015.

    More about this item

    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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