Affine Diffusion Processes: Theory and Applications

30 Pages Posted: 22 Feb 2009

See all articles by Damir Filipović

Damir Filipović

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute

Eberhard Mayerhofer

University of Limerick - Department of Mathematics and Statistics

Date Written: 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.

Keywords: Affine Diffusion Process, Exponential Moments, affine term structure models, Riccati Differential Equations

JEL Classification: E43

Suggested Citation

Filipovic, Damir and Mayerhofer, Eberhard, Affine Diffusion Processes: Theory and Applications (February 20, 2009). Available at SSRN: https://ssrn.com/abstract=1333155 or http://dx.doi.org/10.2139/ssrn.1333155

Damir Filipovic

Ecole Polytechnique Fédérale de Lausanne ( email )

Odyssea
Station 5
Lausanne, 1015
Switzerland

HOME PAGE: http://people.epfl.ch/damir.filipovic

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Eberhard Mayerhofer (Contact Author)

University of Limerick - Department of Mathematics and Statistics ( email )

Castletroy, Co
Limerick
Ireland

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