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Asset Pricing Under The Quadratic Class

  • Markus Leippold

    (University of Zurich)

  • Liuren Wu

    (Fordham University)

We identify and characterize a class of term structure models where bond yields are quadratic functions of the state vector. We label this class the quadratic class and aim to lay a solid theoretical foundation for its future empirical application. We consider asset pricing in general and derivative pricing in particular under the quadratic class. We provide two general transform methods in pricing a wide variety of fixed income derivatives in closed or semi­closed form. We further illustrate how the quadratic model and the transform methods can be applied to more general settings.

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File URL: http://econwpa.repec.org/eps/fin/papers/0207/0207015.pdf
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Paper provided by EconWPA in its series Finance with number 0207015.

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Length: 46 pages
Date of creation: 30 Aug 2002
Date of revision:
Handle: RePEc:wpa:wuwpfi:0207015
Note: Type of Document - pdf; prepared on MikTex; to print on postscript; pages: 46 ; figures: included. produced via dvipdfm
Contact details of provider: Web page: http://econwpa.repec.org

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  1. Chacko, George & Viceira, Luis M., 2003. "Spectral GMM estimation of continuous-time processes," Journal of Econometrics, Elsevier, vol. 116(1-2), pages 259-292.
  2. David K. Backus & Chris I. Telmer & Liuren Wu, 1999. "Design and Estimation of Affine Yield Models," GSIA Working Papers 5, Carnegie Mellon University, Tepper School of Business.
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  4. Tomas Björk & Bent Jesper Christensen, 1999. "Interest Rate Dynamics and Consistent Forward Rate Curves," Mathematical Finance, Wiley Blackwell, vol. 9(4), pages 323-348.
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  12. Markus Leippold & Liuren Wu, 1999. "The Potential Approach to Bond and Currency Pricing," Finance 9903004, EconWPA.
  13. Bates, David S., 2000. "Post-'87 crash fears in the S&P 500 futures option market," Journal of Econometrics, Elsevier, vol. 94(1-2), pages 181-238.
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  17. G. Pfann & P. Schotman & R. Tschernig, 1994. "Nonlinear Interest Rate Dynamics and Implications for the Term Structure," SFB 373 Discussion Papers 1994,43, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  18. Michael W. Brandt & Amir Yaron, 2003. "Time-Consistent No-Arbitrage Models of the Term Structure," NBER Working Papers 9458, National Bureau of Economic Research, Inc.
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