A Global Joint Pricing Model of Stocks and Bonds Based on the Quadratic Gaussian Approach

Kentaro Kikuchi ()
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Kentaro Kikuchi: Faculty of Economics, Shiga University

No 18, Discussion Papers CRR Discussion Paper Series B: Financial from Shiga University, Faculty of Economics,Center for Risk Research

Abstract: A Global Joint Pricing Model of Stocks and BondsBased on the Quadratic Gaussian Approach*Kentaro KikuchiAbstractThis work presents a joint model for bond prices, stock prices, and exchangerates within multi-currency economies. The model includes three types of la-tent factors: systematic factors that determine the domestic and foreign interestrates, stock-speci c factors, and currency-speci c factors. By incorporating thestochastic discount factor re ecting these three risk factors, we derive an analyt-ical formula for bond prices and stock prices, and exchange rates based on thequadratic Gaussian approach studied primarily in term structure modeling. Ourmodel has the distinctive feature of capturing market rates in a low interest rateenvironment. Furthermore, the model not only enables a simultaneous estimationof bond, equity and currency risk premiums but also provides a foundation forsolving an investment problem re ecting realistic market conditions.

Keywords: Stochastic discount factor; No arbitrage condition; Quadratic Gaus-sian term structure model; Algebraic Riccati equation (search for similar items in EconPapers)
JEL-codes: E43 F31 G10 G12 (search for similar items in EconPapers)
Pages: 16 pages
New Economics Papers: this item is included in nep-mac and nep-ore
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Citations: View citations in EconPapers (1)

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