On the relation between linearity‐generating processes and linear‐rational models

Damir Filipović, Martin Larsson and Anders B. Trolle

Mathematical Finance, 2019, vol. 29, issue 3, 804-826

Abstract: We review the notion of a linearity‐generating (LG) process introduced by Gabaix and relate LG processes to linear‐rational (LR) models studied by Filipović et al. We show that every LR model can be represented as an LG process and vice versa. We find that LR models have two basic properties that make them an important representation of LG processes. First, LR models can be easily specified and made consistent with nonnegative interest rates. Second, LR models go naturally with the long‐term risk factorization due to Alvarez and Jermann, Hansen and Scheinkman, and Qin and Linetsky. Every LG process under the long forward measure can be represented as a lower dimensional LR model.

Date: 2019
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://doi.org/10.1111/mafi.12198

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:mathfi:v:29:y:2019:i:3:p:804-826

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0960-1627

Access Statistics for this article

Mathematical Finance is currently edited by Jerome Detemple

More articles in Mathematical Finance from Wiley Blackwell
Bibliographic data for series maintained by Wiley Content Delivery ().