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Asset Pricing in a Two-Country Discontinuous General Equilibrium Model

17 Pages Posted: 27 Oct 2008 Last revised: 30 Oct 2008

Ciprian Necula

University of Zurich - Department of Banking and Finance; Bucharest University of Economic Studies, Department of Money and Banking

Date Written: July 5, 2008

Abstract

The aim of this paper is to develop a framework for asset pricing in a continuous time general equilibrium model for a two country Lucas type economy. The model assumes that the output in the two countries follows a jump-diffusion stochastic process characterized by constant growth rates and volatilities and by log-normal amplitude of the jumps. Using this specification we deduce the fundamental evaluation equations for financial assets as well as a formula for the price of exchange rate options in this economy.

Keywords: general equilibrium model, two-country Lucas economy, exchange rate, asset pricing, exchange rate options, jump-diffusion

JEL Classification: C02, C61, D50, G12, G13

Suggested Citation

Necula, Ciprian, Asset Pricing in a Two-Country Discontinuous General Equilibrium Model (July 5, 2008). Available at SSRN: https://ssrn.com/abstract=1289415 or http://dx.doi.org/10.2139/ssrn.1289415

Ciprian Necula (Contact Author)

University of Zurich - Department of Banking and Finance ( email )

Plattenstrasse 14
Z├╝rich, 8032
Switzerland

Bucharest University of Economic Studies, Department of Money and Banking ( email )

6, Romana Square, District 1
Bucharest, 010374
Romania

HOME PAGE: http://www.dofin.ase.ro/cipnec

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