Generalized Transform Analysis of Affine Processes and Applications in Finance

By Hui Chi Chen, Scott Joslin. 2012

58 citations recorded by the source corpus.

Nonlinearity is an important consideration in many problems of finance and economics, such as pricing securities, computing equilibrium, and conducting structural estimations. We extend the transform analysis in Duffie, Pan, and Singleton (2000) by providing analytical treatment of a general class of nonlinear transforms for processes with tractable conditional characteristic functions. We illustrate the applications of the generalized transform method in pricing contingent claims and solving general equilibrium models with preference shocks, heterogeneous agents, or multiple goods. We also apply the method to a model of time-varying labor income risk and study the implications of stochastic covariance between labor income and dividends for the dynamics of the risk premiums on financial wealth and human capital.

Subfields: Finance

View Paper: https://www.semanticscholar.org/paper/b3c009fea36c2e2cef83043064147ff0666a7631

Citations in the corpus

• Density Approximations for Multivariate Affine Jump-Diffusion Processes (2011, unknown): “For example, one could use transition densities developed in this paper, while approximating asset prices using the generalized Fourier transform in Chen and Joslin (2011), whenever the payoff function allows it, or the error expansion method from Kristensen and Mele (2011).”