Generalized Transform Analysis of Affine Processes and Applications in Finance
Name
Chen_Generalized transform.pdf
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515.21 KB
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Adobe PDF
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Author(s)
Chen, Hui
Joslin, Scott Stephen Walter
Date Issued
July 2012
Journal
Review of Financial Studies
Publisher
Oxford University Press
Citation
Chen, H., and S. Joslin. “Generalized Transform Analysis of Affine Processes and Applications in Finance.” Review of Financial Studies 25.7 (2012): 2225–2256.
Version
Author's final manuscript
Abstract
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.
MIT Department
Sloan School of Management
Terms of Use
Creative Commons Attribution-Noncommercial-Share Alike 3.0
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DOI of Published Version
https://doi.org/10.1093/rfs/hhs065
