Intertemporal recursive utility and an equilibrium asset pricing model in the presence of Lévy jumps

Ma, Chenghu

doi:10.1016/j.jmateco.2005.08.003

Cited by 18 publications

(16 citation statements)

References 34 publications

(57 reference statements)

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“…This is because the option prices used for estimation are subject to perturbations and small errors of option prices will be magnified when the denominator δ 2 is infinitely small. With the model in Ma (2006b), we avoid the problem by transforming it into a least square evaluation and estimating the parameters of a linear series which make up the risk-neutral PDF.…”

Section: The Implied Risk-neutral Mgf Obtained From Our Model Is Contmentioning

confidence: 99%

“…The model in this paper is based on Ma (2006b). The author derives a closed form formula for European call options in a particular parameterization of the economy, which generalizes a number of option pricing models in the existing literature.…”

Section: The Modelmentioning

confidence: 99%

“…where t is the current time; the operation symbol L −1 denotes the bilateral inverse Laplace transform operator (see Appendix for more details); C t is the time-t equilibrium price of the European call option; S t is the underlying asset price at time t; X is the strike price; T is the maturity date; r is the continuously compounded risk free interest rate; and This model can be derived as follows (Ma, 2006b). Let y denote ln S T , G(e y ) denote option payoff G(e y ) = (e y − X) + , and p(y) denote the risk-neutral PDF for y.…”

Section: The Modelmentioning

confidence: 99%

“…Little attention has been paid to this area in the literature, in contrast to the interest and development in extracting the risk-neutral PDF from option prices (see Section 2 below and Taylor (2005) for an excellent review). We try to back out the risk-neutral MGF using the wavelet method and price options based on the pricing formula derived by Ma (2006b). Details of the MGF, the wavelet method, and the option pricing formula of Ma (2006b) will be provided in the following sections.…”

Section: Introductionmentioning

confidence: 99%

“…We try to back out the risk-neutral MGF using the wavelet method and price options based on the pricing formula derived by Ma (2006b). Details of the MGF, the wavelet method, and the option pricing formula of Ma (2006b) will be provided in the following sections. The contributions of this paper are as follows.…”

Section: Introductionmentioning

confidence: 99%

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Revealing the implied risk-neutral MGF from options: The wavelet method

Haven

Liu

et al. 2009

Journal of Economic Dynamics and Control

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Options are believed to contain unique information on the risk-neutral moment generating function (MGF) or the risk-neutral probability density function (PDF) of the underlying asset. This paper applies the wavelet method to approximate the implied risk-neutral MGF from option prices.Monte Carlo simulations are carried out to show how the risk-neutral MGF can be obtained using the wavelet method. With the Black-Scholes model as the benchmark, we offer a novel method to reveal the implied MGF, and to price in-sample options and forecast out-of-sample option prices with the estimated MGF.JEL Classification: C02, C63, G13

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Section: The Implied Risk-neutral Mgf Obtained From Our Model Is Contmentioning

confidence: 99%

Section: The Modelmentioning

confidence: 99%

Section: The Modelmentioning

confidence: 99%