Complex Times: Asset Pricing and Conditional Moments Under Non-Affine Diffusions

Fisher College of Business Working Paper No. 2007-03-009

Charles A. Dice Center Working Paper No. 2007-6

45 Pages Posted: 22 Mar 2007 Last revised: 27 Sep 2010

Date Written: January 9, 2009

Abstract

Many applications in continuous-time financial economics require conditional moments or contingent claims prices, but such expressions are known in closed-form for only a few specific models. Power series (in the time variable) for these quantities are easily derived, but often fail to converge, even for very short time horizons. We characterize a large class of continuous-time non-affine conditional moment and contingent claim pricing problems with solutions that are analytic in the time variable, and that therefore can be represented by convergent power series. The ability to approximate solutions accurately and in closed-form simplifies the estimation of latent variable models, since the state vector must be extracted from observed quantities for many different parameter vectors during a typical estimation procedure.

JEL Classification: G12, G13

Suggested Citation

Kimmel, Robert L., Complex Times: Asset Pricing and Conditional Moments Under Non-Affine Diffusions (January 9, 2009). Fisher College of Business Working Paper No. 2007-03-009; Charles A. Dice Center Working Paper No. 2007-6. Available at SSRN: https://ssrn.com/abstract=975499 or http://dx.doi.org/10.2139/ssrn.975499

Robert L. Kimmel (Contact Author)

Independent

No Address Available

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