Generalized Transform Analysis of Affine Processes and Applications in Finance
Nonlinearity is an important consideration in many problems of finance and economics, such as pricing securities and solving equilibrium models. This article provides analytical treatment of a general class of nonlinear transforms for processes with tractable conditional characteristic functions. We...
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| Other Authors: | |
| Format: | Article |
| Language: | en_US |
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Oxford University Press
2012
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| Online Access: | http://hdl.handle.net/1721.1/74650 https://orcid.org/0000-0001-9605-641X |
| _version_ | 1826207040747339776 |
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| author | Chen, Hui Joslin, Scott Stephen Walter |
| author2 | Sloan School of Management |
| author_facet | Sloan School of Management Chen, Hui Joslin, Scott Stephen Walter |
| author_sort | Chen, Hui |
| collection | MIT |
| description | Nonlinearity is an important consideration in many problems of finance and economics, such as pricing securities and solving equilibrium models. This article provides analytical treatment of a general class of nonlinear transforms for processes with tractable conditional characteristic functions. We extend existing results on characteristic function-based transforms to a substantially wider class of nonlinear functions while maintaining low dimensionality by avoiding the need to compute the density function. We illustrate the applications of the generalized transform in pricing defaultable bonds with stochastic recovery. We also use the method to analytically solve a class of general equilibrium models with multiple goods and apply this model to study the effects of time-varying labor income risk on the equity premium. |
| first_indexed | 2024-09-23T13:42:33Z |
| format | Article |
| id | mit-1721.1/74650 |
| institution | Massachusetts Institute of Technology |
| language | en_US |
| last_indexed | 2024-09-23T13:42:33Z |
| publishDate | 2012 |
| publisher | Oxford University Press |
| record_format | dspace |
| spelling | mit-1721.1/746502022-10-01T16:40:29Z Generalized Transform Analysis of Affine Processes and Applications in Finance Chen, Hui Joslin, Scott Stephen Walter Sloan School of Management Chen, Hui Joslin, Scott Stephen Walter Nonlinearity is an important consideration in many problems of finance and economics, such as pricing securities and solving equilibrium models. This article provides analytical treatment of a general class of nonlinear transforms for processes with tractable conditional characteristic functions. We extend existing results on characteristic function-based transforms to a substantially wider class of nonlinear functions while maintaining low dimensionality by avoiding the need to compute the density function. We illustrate the applications of the generalized transform in pricing defaultable bonds with stochastic recovery. We also use the method to analytically solve a class of general equilibrium models with multiple goods and apply this model to study the effects of time-varying labor income risk on the equity premium. 2012-11-15T18:05:15Z 2012-11-15T18:05:15Z 2012-07 Article http://purl.org/eprint/type/JournalArticle 0893-9454 1465-7368 http://hdl.handle.net/1721.1/74650 Chen, H., and S. Joslin. “Generalized Transform Analysis of Affine Processes and Applications in Finance.” Review of Financial Studies 25.7 (2012): 2225–2256. https://orcid.org/0000-0001-9605-641X en_US http://dx.doi.org/ 10.1093/rfs/hhs065 Review of Financial Studies Creative Commons Attribution-Noncommercial-Share Alike 3.0 http://creativecommons.org/licenses/by-nc-sa/3.0/ application/pdf Oxford University Press SSRN |
| spellingShingle | Chen, Hui Joslin, Scott Stephen Walter Generalized Transform Analysis of Affine Processes and Applications in Finance |
| title | Generalized Transform Analysis of Affine Processes and Applications in Finance |
| title_full | Generalized Transform Analysis of Affine Processes and Applications in Finance |
| title_fullStr | Generalized Transform Analysis of Affine Processes and Applications in Finance |
| title_full_unstemmed | Generalized Transform Analysis of Affine Processes and Applications in Finance |
| title_short | Generalized Transform Analysis of Affine Processes and Applications in Finance |
| title_sort | generalized transform analysis of affine processes and applications in finance |
| url | http://hdl.handle.net/1721.1/74650 https://orcid.org/0000-0001-9605-641X |
| work_keys_str_mv | AT chenhui generalizedtransformanalysisofaffineprocessesandapplicationsinfinance AT joslinscottstephenwalter generalizedtransformanalysisofaffineprocessesandapplicationsinfinance |