The State VariablesState variables Model and the Valuation Valuations Partial Differential EquationPartial differential equation (PDE)

Patrice Poncet () and Roland Portait
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Patrice Poncet: ESSEC Business School
Roland Portait: ESSEC Business School

Chapter 20 in Capital Market Finance, 2022, pp 847-869 from Springer

Abstract: Abstract In this chapter, asset prices are assumed to be governed by specialized Itô processes, namely diffusion processes that depend on state variables. These variables, intended to represent the state of the economy, also follow diffusion processes. These particular processes lead to very useful additional results. After introducing the framework and notation (Sect. 20.1), we provide two ways of defining the factors governing returns (Sect. 20.2), two versions of the Arbitrage Pricing Theory that can be applied in this context (Sect. 20.3), the partial differential equation governing asset prices (Sect. 20.4), some applications in modeling interest rates (Sect. 20.5), the pricing of assets in the risk-neutral universe (Sect. 20.6) and discounting under uncertainty using Feynman-Kac formula (Sect. 20.7).

Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sptchp:978-3-030-84600-8_20

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DOI: 10.1007/978-3-030-84600-8_20

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