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Affine Diffusion Processes: Theory and ApplicationsDamir FilipovicEcole Polytechnique Fédérale de Lausanne; Swiss Finance Institute Eberhard MayerhoferDeutsche Bundesbank, Research Centre February 20, 2009 Abstract: We revisit affine diffusion processes on general and on the canonical state space in particular. A detailed study of theoretic and applied aspects of this class of Markov processes is given. In particular, we derive admissibility conditions and provide a full proof of existence and uniqueness through stochastic invariance of the canonical state space. Existence of exponential moments and the full range of validity of the affine transform formula are established. This is applied to the pricing of bond and stock options, which is illustrated for the Vasicek Cox-Ingersoll-Ross and Heston Models.
Number of Pages in PDF File: 30 Keywords: Affine Diffusion Process, Exponential Moments, affine term structure models, Riccati Differential Equations JEL Classification: E43 working papers seriesDate posted: February 22, 2009Suggested CitationContact Information
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